What Are R&E Expenses?
If your business invests in innovation, testing, or product development, you probably know the term R&D. But the IRS refers to these costs as Research and Experimental (R&E) expenses. While the terms sound similar, the tax treatment is specific, and recent rule changes have made it more critical than ever for small businesses to understand how R&D works.
While the tax code previously limited the deductibility of these expenses, causing financial strain for many, the recently passed One Big Beautiful Bill Act has drastically changed that. Here’s what you need to know.
From Capitalization to Immediate Expensing (Mostly)
Before 2022, under Section 174 of the Internal Revenue Code, taxpayers could immediately deduct research and development (R&D) expenses in the year they were incurred. This treatment encouraged investment in innovation, as companies could realize a current tax benefit for eligible costs.
However, beginning in 2022, the Tax Cuts and Jobs Act (TCJA) (which was passed in 2017) changed the rules. Under the TCJA, R&D expenses were required to be capitalized and amortized over five years for domestic activities and 15 years for foreign activities. This meant businesses couldn’t take an immediate deduction for their research spending.
The One Big Beautiful Bill Act, signed into law by President Donald Trump on July 4, 2025, largely reverses this.
Under the new law, taxpayers can immediately deduct all domestic R&D expenditures paid or incurred in taxable years beginning after December 31, 2024. This provision is now permanent, restoring the pre-2022 treatment for domestic R&E.
It’s important to note that foreign R&D expenditures must still be capitalized and amortized over 15 years under Section 174. The bill also clarifies that amounts paid or incurred for software development can be treated as an R&E expenditure.
Addressing Past Capitalized Expenses
For R&D expenses incurred between 2022 and 2024 (the period when amortization was mandatory), the One Big Beautiful Bill Act offers relief:
- For eligible small businesses: Small businesses (generally those with average annual gross receipts of $31 million or less) can retroactively expense domestic R&D expenditures for tax years beginning after December 31, 2021, by filing amended returns. This is a significant “catch-up” provision for the businesses most impacted by the previous change.
- For all other taxpayers: Any taxpayer that capitalized domestic R&D expenses between January 1, 2022, and December 31, 2024, can elect to accelerate the remaining unamortized amounts over a one- or two-year period, beginning with the first taxable year after December 31, 2024.
The Practical Impact on Businesses
This restoration of immediate deductibility for domestic R&D expenditures is a significant victory for startups, tech firms, and manufacturers that heavily invest in research and development. The shift from mandatory amortization back to immediate expensing alleviates the cash flow issues and significant tax hikes that many innovation-heavy firms faced, even when operating at a loss.
This change restores financial flexibility and is expected to stimulate a new wave of research, development, and economic growth across the nation.
Next Steps for Your Business
With the “One Big Beautiful Bill Act” now law, businesses should:
- Review their R&D spending: Understand the distinction between domestic and foreign R&D to apply the correct tax treatment.
- Consider amending prior returns (if applicable): Small businesses should assess the opportunity to amend 2022-2024 tax returns to claim full deductions and potentially receive refunds.
- Adjust future tax planning: Factor in the immediate deductibility of domestic R&D for tax years beginning after December 31, 2024.
- Prepare for accounting method changes: The changes to R&D accounting treatment will likely be considered a change in accounting method, and while the IRS is expected to issue guidance, taxpayers should be prepared for any required filings (e.g., Form 3115).
This legislative change provides much-needed clarity and relief for businesses investing in innovation. Contact us if you have questions about how these changes affect your specific business and tax situation.