OBBBA: R&D Expenses Deduction

New Tax Rule Lets Businesses Fully Deduct Domestic Research Expenses! Starting 2025

Starting with tax years after December 31, 2024, the IRS will allow a full deduction of domestic research and experimental expenses in the year you pay or incur them.

This is a major update in how research costs are handled for tax purposes.

What’s the Change?

Before, businesses often had to capitalize these costs and deduct them over several years — or had complicated rules to follow.

The new rule adds Section 174A, which says you can fully expense domestic research and experimental costs right away. That means you get a bigger tax break upfront, improving your cash flow.

Domestic here means expenses related to research conducted inside the U.S., excluding foreign research costs, which follow separate rules.

Optional Amortization

If you prefer, you can still choose to amortize (spread out) certain domestic research costs over at least five years instead of deducting them immediately. You have to make this choice when you file your return, and once chosen, you generally must stick to it in future years unless the IRS says otherwise.

What Counts as Domestic Research Expenses?

 ➟  Costs related to developing new products, processes, or software within your U.S. business
 ➟  Software development costs are included
 ➟  Does NOT include buying or improving land or property that can be depreciated
 ➟  Does NOT include costs for oil, gas, or mineral exploration

How Does This Help Your Business?

Let’s say your small tech company in Houston spends $500,000 in 2025 developing a new software product.

Before this new tax rule, you would have had to spread that deduction over several years, which means smaller tax savings each year and less immediate cash flow.

With the updated rule, you can deduct the entire $500,000 on your 2025 tax return.

This lowers your taxable income right away, potentially saving you tens of thousands in taxes that year. That extra cash can be used to invest more in innovation, hire staff, or cover day-to-day expenses.

If you prefer a steadier approach, you can choose to amortize the $500,000 over at least five years instead.

That way, you’d deduct $100,000 each year, smoothing out your tax benefits over time.

This flexibility lets you decide what works best for your business’s financial strategy.

Important Details to Remember

-This applies for tax years starting after December 31, 2024 (so mostly for 2025 tax returns and beyond).

-Small businesses can elect to apply the rule retroactively to tax years starting after December 31, 2021, but they must file amended returns and notify the IRS.

-The rule excludes foreign research expenses, which have their own tax rules.

-Certain costs like land acquisition and mineral exploration are excluded.

Why This Matters

This change encourages businesses to invest more aggressively in U.S.-based research by giving them faster tax relief. For startups and growing companies especially, this can improve cash flow and free up resources to innovate and grow.

If your business spends money on research and development in the U.S., now is a good time to review your tax strategy and plan how to maximize this new deduction.

Example of Retroactive Election for Small Businesses

Let’s say your small business in Houston spent $300,000 on domestic research in 2022. Instead of deducting it all at once, you spread the deduction over five years and claimed $60,000 each year on your tax returns, including 2022.

With the new tax rule, starting with your 2025 tax return, you can choose to deduct any remaining balance all at once. So if by the end of 2024 you still have $240,000 left to deduct, you have two options:

• Deduct the full $240,000 in 2025 as a one-time deduction, OR

• Spread the deduction evenly over two years — $120,000 in 2025 and $120,000 in 2026.

To make this change, you’ll need to file amended tax returns for the years affected and inform the IRS about your election

Ready to Maximize Your R&D Deductions?  

Navigating the new tax rules around domestic research expenses can be complex. Understanding how to apply these changes can make a real difference in your business’s tax outcome.

It’s important to know how these deductions work and how to track them properly.

If you want to learn more about maximizing your research expense deductions and making informed tax decisions, I’m here to share insights and answer your questions.

Let’s explore how these updates could impact your business.

We serve businesses in Houston and surrounding areas, including Pasadena, Deer Park, League City, La Porte, and Galveston.