Written by Elaria G. Abader, CPA
The One Big Beautiful Bill Act (OBBA) is a major U.S. law signed on July 4, 2025, that makes key provisions of the 2017 Tax Cuts and Jobs Act (TCJA) permanent while adding new policies. This article focuses on Section 70302, which covers the full expensing of domestic research and experimental (R&E) costs. This article is intended as a general overview of Section 70302, rather than an exhaustive explanation, and is provided to help initiate further discussion. This article is for informational purposes only and should not be construed as tax, legal, or accounting advice. The application of Section 70302 and IRC §174A depends on each taxpayer's specific facts and circumstances.
Section 70302 of the OBBBA introduces new tax code §174A, allowing businesses to immediately deduct domestic R&E costs for tax years beginning after December 31, 2024. (Public Law 119-21, §70302) (Rev. Proc. 2025-28) Small businesses with average annual gross receipts of $31 million or less (subject to inflation adjustments) can retroactively apply this deduction to tax years starting after December 31, 2021. This change reverses the TCJA rule that required amortizing these costs over five years for domestic research and 15 years for foreign research. Taxpayers may still elect to capitalize and amortize over at least 60 months. Immediate expensing applies to software development but excludes natural resource exploration, land purchases, and depreciable or depletable property. Foreign R&E costs remain subject to 15-year amortization. This provision offers significant benefits for U.S. businesses with substantial R&D activity, small businesses, software developers, and companies that previously amortized domestic R&E costs. The provision is intended to encourage domestic research activity by restoring immediate deductions for qualifying U.S. R&E expenditures. (Rev. Proc. 2025-28) (Thomson Reuters R&E Provisions in the New Tax Act)
Depending on the taxpayer's circumstances and the election chosen, implementation may require a change in accounting method, including the use of a §481(a) adjustment in certain situations. A section 481(a) adjustment is a one-time catch-up adjustment required by the IRS when a taxpayer changes their accounting method with the purpose of preventing deductions from being omitted or duplicated. Eligible small business taxpayers generally may be able to retroactively apply §174A to tax years beginning after December 31, 2021, subject to the procedural requirements and filing deadlines contained in Rev. Proc. 2025-28 and applicable refund-claim statutes of limitation. Taxpayers may elect immediate expensing, amortization over at least 60 months, or 10-year amortization, with elections made on timely filed returns. Taxpayers should maintain thorough documentation supporting their R&E expenditures and elections to substantiate their tax positions in the event of an IRS examination. (Rev. Proc. 2025-28) (Thomson Reuters – Experts Offer Tips on R&E Expensing Post-OBBB)
Immediate expensing of domestic R&E costs may reduce taxable income and boost cash flow. Small businesses amending prior year returns may be able to recover previously paid taxes resulting in additional cash flow. This accelerated deduction and reduction in taxable income may also result in lower quarterly estimated payments. Proactive planning is crucial as missed deadlines or incomplete submissions can eliminate potential cash flow advantages.
While this provision offers exciting opportunities, we recommend reaching out for guidance on next steps, key deadlines, and eligibility review to ensure you maximize benefits and stay fully compliant with IRS requirements.
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References:
- Internal Revenue Service. (2025). Revenue Procedure 2025-28.
https://www.irs.gov/pub/irs-drop/rp-25-28.pdf - Thomson Reuters. (2025). R&E Provisions in the New Tax Act. Checkpoint News.
https://tax.thomsonreuters.com/news/re-provisions-in-the-new-tax-act/ - Thomson Reuters, Experts Offer Tips on R&E Expensing Post-OBBB, Checkpoint News.
https://tax.thomsonreuters.com/news/experts-offer-tips-on-re-expensing-post-obbb/ - U.S. Congress. (2025). One Big Beautiful Bill Act (OBBBA), Public Law 119-21, Section 70302.
https://www.congress.gov/bill/119th-congress/house-bill/1