OBBBA – Tax Treatment of R&D Expensing and Bonus Depreciation

The One Big Beautiful Bill Act (OBBBA) significantly impacts the tax treatment for businesses of research and development (R&D) expense and bonus depreciation. These new provisions offer substantial benefits and  crucial planning opportunities for businesses looking to invest and innovate. Following is a breakdown of the key changes.

R&D expensing: Immediate Deductions Restored

Internal Revenue Code section 174 was enacted in 1954, allowing companies the option of either deducting research and experimental expenses in the year they were paid or amortizing them over a period of five or more years. Under the Tax Cuts and Jobs Act of 2017 (TCJA), the law changed, requiring businesses to capitalize and amortize domestic R&D costs over a five-year period (or a fifteen-year period for foreign R&D expenditures). The change was largely made to pay for other tax cuts in TCJA. With the passage of OBBBA,  code section 174A was created, allowing businesses to once again fully deduct domestic research and experimental expenditures in the year incurred. Under section 174A, businesses can also opt to amortize these costs over at least five years, providing some flexibility for long-term planning. Foreign R&D must still be amortized over 15 years.

Key R&D Provisions

Full Expensing Restored

Beginning in tax year 2025, businesses can again deduct certain domestic R&D costs in the year they are incurred. This restoration can provide immediate tax savings and improve cash flow.

Retroactive Relief for Small Businesses

Smaller businesses, those with average annual gross receipts of $31 million or less, can apply immediate expensing retroactively to tax years 2022 to 2024 by amending previous year  tax returns to claim immediate deductions for domestic R&D expenses.

Accelerated Relief for Larger Businesses

Businesses exceeding the $31M threshold can’t retroactively amend but can accelerate any remaining amortized domestic R&D costs from 2022–2024 into 2025 or split over 2025–2026.

Accelerated Dedication of Unamortized Costs

All taxpayers, regardless of size, that capitalized domestic R&D expenses between January 1, 2022, and January 1, 2025, can now elect  to accelerate the deduction of any remaining unamortized amounts over a one-year or a two-year period.

Coordination with R&D Tax Credit

The OBBBA brings clarity to the interaction between the R&D tax credit and R&D expense deductions. It specifies that taxpayers must reduce any deductible R&D expense by the amount of credit claimed, eliminating the possibility of a double benefit.

Accelerated Depreciation: 100 percent Bonus Reinstated

Key Bonus Depreciation Provisions

• 100 Percent Bonus Depreciation Permanently Reinstated

Businesses can now immediately deduct the full cost of eligible new or used tangible personal property placed in service after January 19, 2025. A phase-down schedule that gradually decreased the bonus deduction in future years was eliminated. Further, there is no annual cap on the deductible amount. These changes are permanent under OBBBA. Please note that property placed in service between January 1, 2025, and January 18, 2025, only qualifies for 40 percent bonus depreciation.

• New Bonus Depreciation for Qualified Production Property (QPP)

A new depreciation provision applies to nonresidential real estate used in the manufacturing, production, or refining of tangible personal property. The new bonus depreciation for this qualified production property (QPP) is applicable to property whose  construction begins after December 31, 2024, and before January 1, 2029. Such property must be placed in service before January 1, 2031.

• Section 179 Expensing Limit Increased

The maximum Section 179 expensing limit increased from $1.25 million to $2.5 million with a phase-out beginning at $4 million for property placed in service after December 31, 2024. These amounts will be adjusted annually for inflation. This increase offers small businesses and startups expanded opportunities to write off equipment costs.

Strategic takeaways:

Businesses should act swiftly to review past filings and adjust tax planning to maximize deductions. Specifically:

1. Identify R&D spending from 2022–2024 and analyze qualification for retroactive deductions.
2. Amend returns (for small firms under $31M) or plan accelerated deductions for others.
3. Revise capital budgeting: Align new asset acquisitions under bonus depreciation and Section 179.

The potential impacts of these changes can be significant. Contact your R&A advisor for guidance on your specific situation.