To Expense or Amortize R&D, That is the Question: July 6, 2026 Deadline and Planning Opportunities under the One Big Beautiful Bill Act

Executive Summary

The enactment of the One Big Beautiful Bill Act of 2025, P.L. No. 119-2 (OBBBA), introduced amendments to Section 174^[1] and created new Section 174A under the Code, which directly impact whether a taxpayer may expense or amortize their foreign and domestic research or development (R&D) expenditures.

• Foreign R&D: OBBBA confirms foreign R&D expenditures must be capitalized and amortized over 15 years under Section 174.
• Domestic R&D: OBBBA reinstates immediate expensing of domestic R&D expenditures and allows taxpayers to elect to capitalize and amortize certain expenditures under new Section 174A (and through a series of correlative amendments to other Code Sections, it confirms the ability to apply Section 59(e) to domestic R&D allowable as a deduction under Section 174A(a)).

On August 28, 2025, the IRS released Revenue Procedure 2025-28 (Rev. Proc. 2025-28), which provides administrative guidance on the changes to the treatment of foreign and domestic R&D expenditures. In addition, Rev. Proc. 2025-28 provides certain taxpayers who made domestic R&D expenditures a limited opportunity to make timely elections and file amended returns to claim refunds by July 6, 2026.

The Road Leading to OBBBA and R&D Expenditure Deductions 

From 1954 until changes effective as a result of Tax Cuts and Jobs Act (TCJA) of 2017, P.L. 115-97, Section 174, in combination with the later-enacted Section 59, provided up to four potential ways to account for R&D:

1. deducting expenditures as paid or incurred;
2. deducting costs over at least 60 months;
3. charging the costs to capital account; and
4. deducting expenditures over 10 years.

These rules were in effect until the enactment of TCJA, when Section 174 was amended to require amortization over 5 years for domestic specified R&D or 15 years for foreign specified R&D for taxable years beginning after December 31, 2021.

This change removed electivity of treatment and created the need for the promulgation of substantive and procedural guidance. Multiple rounds of tax accounting method changes allowed taxpayers to comply with the statute and evolving guidance.^[2]

Changes to Section 174 and Rev. Proc. 2025-28

Prior to OBBBA, Section 174 (which was effective for amounts paid or incurred in tax years beginning after December 31, 2021) required “specified research or experimental expenditures” to be capitalized and amortized ratably over a 5-year period (15-year period for expenditures attributable to foreign research).^[3]

Under OBBBA’s new Section 174 (effective as of July 4, 2025), the statutory language now only refers to a taxpayer’s foreign R&D expenditures and maintains the 15-year capitalization and amortization requirement beginning with the midpoint of the taxable year.

In addition, under TCJA Section 174(d), any unamortized R&D relating to property that is disposed of, retired or abandoned during the amortization period may not be deducted on account of the disposition, retirement or abandonment, and must continue to be amortized (the Disposition Rule). As a result of the OBBBA amendments to Section 174(d), the Disposition Rule only applies to unamortized foreign R&D expenditures.

In the case of foreign R&D expenditures, Rev. Proc. 2025-28 prescribes how a taxpayer may come forward and comply with the capitalization rules and necessarily file a change of accounting method request on IRS Form 3115 (Application for Change in Accounting Method) and capture any negative adjustments under Section 481.

Introduction of Section 174A – Domestic R&D Expenditures

OBBBA’s Section 174A installs pre-TCJA treatment and planning opportunities in the context of domestic R&D expenditures. Section 174A(a) provides:

Notwithstanding section 263, there shall be allowed as a deduction any domestic research or experimental expenditures which are paid or incurred by the taxpayer during the taxable year.

Under Section 174A(b), “domestic research or experimental expenditures” means research or experimental expenditures paid or incurred by the taxpayer in connection with the taxpayer’s trade or business other than such expenditures which are attributable to foreign research.

Section 174A(c) provides the taxpayer with the ability to elect to amortize certain domestic R&D expenditures. If elected, the taxpayer must charge the domestic R&D expenditures to a capital account and is allowed an amortization deduction of such expenditures ratably over such period of not less than 60 months as may be selected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures).

Procedurally, the election to amortize domestic R&D expenditures may be made for any taxable year, but only if made not later than the time prescribed by law for filing the return for such taxable year (including extensions). The method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent taxable years unless, with the approval of the Secretary, a change to a different method (or to a different period) is authorized with respect to part or all of such expenditures. The election shall not apply to any expenditure paid or incurred during any taxable year before the taxable year for which the taxpayer makes the election.

July 6, 2026 Refund Opportunity for Qualified Small Businesses

For domestic R&D expenditures, Rev. Proc. 2025-28 provides a refund opportunity for certain small business taxpayers. To qualify, the business must:

• Not be a tax shelter under Section 448(d)(3) and Treas. Reg. Section 1.4482(b)(2), and
• Meet the Section 448(c) gross receipts test as provided in Treas. Reg. Section 1.448-2(c) for its first taxable year beginning after December 31, 2024 (i.e., average annual gross receipts not exceeding $31 million for the prior three years).

If the small business qualifies, it may elect to apply Section 174A retroactively to tax years beginning between 2022 through 2024 without necessarily triggering a change of accounting method by filing amended returns. This process must be completed by July 6, 2026.

Small business taxpayers may also elect by July 6, 2026, to:

• Make a late adjustment to the amount of research credit (under Sections 41 and 280C) and have the credit and expense provisions for wages or research costs not apply to the taxpayer; and
• Revoke a prior election to reduce the amount of credit under Section 280C.

Elective Catch-Up Relief for Large Businesses

Taxpayers may elect to recognize and “catch-up” the unamortized balance of domestic R&D subject to amortization under the TCJA either entirely in the first taxable year beginning after December 31, 2024, or split equally over two years.

If you have questions, please contact a member of our Tax Section to assist with R&D questions resulting from the OBBBA and recent IRS guidance.

1. Unless otherwise indicated, all “Section” references are to the Internal Revenue Code of 1986, as amended (the Code), and all “Reg. Section” references are to the U.S. Department of the Treasury regulations promulgated thereunder.
2. IRS Notice 2023-63, 2023-39 IRB 919, represented a significant step in the promulgation of substantive rules, which was later modified and clarified by IRS Notice 2024-12, 2024-5 IRB.
3. For purposes of these rules, foreign research under Section 41(d)(1)(F) encompasses any research conducted outside of the United States, the Commonwealth of Puerto Rico, or any possession of the United States.

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