R&D Tax Law Changes for 2025: What Changed and Why It Matters

By: Kevin Labau, CPA and Kevin R. Bass, CPA

Businesses that invest in research and development received welcome news with the passage of the One Big Beautiful Bill Act (OBBBA). Beginning with tax years starting January 1, 2025, companies can once again immediately deduct certain domestic R&D expenses rather than capitalizing and amortizing those costs over multiple years.

The change reverses a controversial provision of the Tax Cuts and Jobs Act (TCJA) and could create meaningful tax savings and cash flow benefits for many businesses.

Background: What Changed from 2022–2024

From 2022 through 2024, businesses were required to:

• Capitalize and amortize domestic R&D costs over 5 years
• Capitalize and amortize foreign R&D costs over 15 years
• No longer deduct expenses immediately

This change increased taxable income and reduced near-term cash flow, especially for R&D-heavy businesses.

The 2025 Change: Return to Immediate Expensing

Effective for tax years beginning after December 31, 2024, the law now permits:

1. Immediate Deduction of Domestic R&D – Businesses can fully deduct domestic R&D costs in the year incurred. This is codified under new IRC §174A.
2. Optional Capitalization – Taxpayers may elect to capitalize and amortize domestic R&D (generally 60 months or more), but this is now optional rather than required.
3. Foreign R&D Still Amortized – No change for foreign research, which must still be amortized over 15 years.

Transition Rules for 2022–2024 Costs

The legislation provides important relief for R&D costs capitalized under the prior rules.

Taxpayers who capitalized domestic R&D costs during 2022-2024 may have several options available for recovering those costs.

Catch-Up Deduction Options

Taxpayers may:

• Deduct all remaining unamortized domestic R&D in 2025, or
• Spread the deduction across 2025 and 2026

Small Business Retroactive Relief

Businesses under approximately $31M in average gross receipts may:

• Amend 2022–2024 returns
• Fully expense R&D retroactively

Rules for Larger Businesses

Larger businesses generally cannot amend prior years but can accelerate recovery of remaining balances beginning in 2025

Key Technical Changes

Domestic vs. Foreign R&D Treatment

• Domestic R&D expenses are now addressed under §174A, which allows immediate expensing.
• Foreign R&D expenses remain under §174 and must still be amortized.

Accounting Method

• Businesses switching from amortizing R&D costs to immediately expensing them may need to account for the change under IRS accounting method rules
• The IRS provided guidance in Rev. Proc. 2025-28 explaining how businesses can implement this change

What This Means for Businesses

1. Improved Cash Flow – The ability to immediately deduct R&D costs reduces taxable income in the current year, which:

• Lowers current tax liability
• Eliminates deferral of deductions
• Provides immediate liquidity benefits

This is particularly impactful for profitable companies that were previously forced to spread deductions over multiple years.

2. Increased Incentive to Invest in R&D – Reduces the after-tax cost of innovation and encourages reinvestment in:

• Technology
• Product development
• Process improvements

The change is generally viewed as restoring competitiveness with countries offering more aggressive R&D incentives.

3. Planning Complexity (Short-Term) – While favorable, the new regime introduces several planning considerations, including whether to expense vs. elect amortization of R&D costs. This could have an impact on taxes at both the federal and state levels. In particular, modeling is required to optimize outcomes between deductions, credits, and timing.

4. Balance Sheet and Financial Reporting Effects – For companies that retroactively deduct prior-year R&D, this may allow them to amend prior-year returns and potentially receive tax refunds.

5. Shift Toward Domestic Research – Because only domestic R&D qualifies for full expensing, businesses may consider:

• Location of research activities
• Use of foreign vs. U.S.-based development

This may influence broader strategic decisions around operations and staffing.

Next Steps

The return of immediate expensing for domestic R&D costs represents a significant tax planning opportunity for many businesses. Companies that incurred R&D expenditures between 2022 and 2024 should also evaluate whether transition relief or accelerated deductions may be available.

Because the new rules include elections, accounting method considerations, and potential tax implications, businesses should review their situation carefully before filing.

If you have questions about how these changes may affect your business, contact the tax professionals at Rivero, Gordimer & Company to discuss your options.

Frequently Asked Questions

Can I deduct R&D expenses immediately in 2025?

Yes. For tax years beginning after December 31, 2024, businesses can generally deduct qualifying domestic R&D expenses in the year they are incurred. This restores immediate expensing for domestic research costs and reverses the capitalization requirement that applied from 2022 through 2024.

Do I still have to amortize R&D expenses?

It depends on where the research is performed. Domestic R&D expenses can generally be deducted immediately beginning in 2025, while foreign R&D expenses must still be capitalized and amortized over fifteen years.

What happens to R&D expenses that were capitalized between 2022 and 2024?

The new legislation provides transition relief for previously capitalized domestic R&D costs. Depending on the circumstances, businesses may be able to deduct remaining unamortized amounts in 2025 or spread the deduction across 2025 and 2026.

Can I amend prior tax returns for R&D expenses?

Some businesses may be eligible. Companies with average gross receipts of approximately $31 million or less may be able to amend 2022 through 2024 tax returns and fully expense qualifying domestic R&D costs retroactively.

Does the new R&D tax law apply to foreign research activities?

No. The favorable 2025 changes apply to domestic R&D expenditures. Foreign R&D costs must still be capitalized and amortized over fifteen years.

How do the 2025 R&D tax changes affect my business?

The return of immediate expensing may reduce taxable income, improve cash flow, and create new tax planning opportunities. Businesses that incurred R&D expenses between 2022 and 2024 should review whether transition relief or accelerated deductions may be available.