Top R&E Expense Deduction Issues Impacted by the One Big Beautiful Bill Act

Violet Goodheart, Director of Federal Tax and Accounting Methods at Ryan, recently discussed the highlights, concerns, and opportunities related to the deduction for research and experimental (R&E) expenditures as impacted by the One Big Beautiful Bill Act (OBBBA).

Top R&E Expense Deduction Issues Impacted by the One Big Beautiful Bill Act

Interviewer: First, can you remind readers of the most important change to the R&E deduction under OBBBA?

Goodheart: Sure, let me first remind people that the 2017 Tax Cuts and Jobs Act (TCJA) required specified R&E expenditures after 2021 to be capitalized and amortized for five years for domestic research and 15 years for foreign research. OBBBA―under a newly enacted Section 174A―allows taxpayers to fully expense domestic expenditures paid or incurred beginning after December 31, 2024. This immediate deduction is intended to be permanent.

Interviewer: You said “allows” taxpayers to fully expense domestic R&E expenditures. This presumes that there are choices.

Goodheart: Right, OBBBA allows taxpayers to elect to capitalize domestic R&E expenditures and amortize them ratably over a period not less than 60 months or more than 10 years under Section 59(e), excluding property subject to the allowance for depreciation or depletion.

Interviewer: Why would taxpayers make this election?

Goodheart: The most obvious reason is that taxpayers may be in a loss position and not be able to benefit from a full deduction for domestic R&E expenditures.

Interviewer: Remind people about foreign research expenses.

Goodheart: The foreign R&E expenditures must continue to be capitalized and amortized for 15 years―as provided under the TCJA. This should prompt taxpayers to carefully consider where to make their R&E investment decisions.

Interviewer: Why is it important that the deduction for domestic expenses be made permanent?

Goodheart: Uncertainty from year to year is difficult for taxpayers to properly plan their tax position.

Interviewer: The legislation did provide for some transition rules for previous years―can you briefly explain them?

Goodheart: Yes, under OBBBA, unamortized amounts for domestic research that were capitalized from 2022 through 2024 can be immediately deducted in 2025 or deducted ratably over 2025 and 2026.

Interviewer: We have focused on the most newsworthy change―for immediate expensing under Section 174A, but can we touch on some of the other important changes related to R&E?

Goodheart: OBBBA made a change to the research credit under IRC Section 41. Under the prior version of the statute, expenditures may be treated as qualified R&E for purposes of the credit, regardless of whether they were deducted under Section 174A. Also, taxpayers that claim the credit must decide whether to reduce domestic R&E expenditures by the amount of the credit as there was correction to Section 280(c)(1).

Interviewer: Are there interactions with other provisions that taxpayers might not be aware of?

Goodheart: Yes, the Section 174A provisions interact with several other provisions that are dependent upon taxable income results, such as GILTI, FDII, BEAT, and the 163(j) (business interest limitation). For example, will deducted domestic R&E expenditures, which impact taxable income, negatively impact the business interest limitation? This should prompt taxpayers to consider what option works best for them. But there are many other potential interactions with this change.

Interviewer: Can you briefly touch on the state and local tax implications?

Goodheart: With the return to an immediate deduction of domestic R&E expenditures, states that conform to the federal regulations will follow the new rules unless they decide to decouple these sections. The states that are not in automatic conformity will have to evaluate what steps they may wish to take.

Interviewer: We briefly addressed the need for modeling the impact of the changes addressed here. What are some of the other key takeaways taxpayers should consider?

Goodheart: We can add assistance to a taxpayer to identify what to model to give them enough information to make decisions that are best for their companies.

Interviewer: Thank you for your time today.

Please see the following links for on-demand access to Ryan’s OBBBA webinars:

Contact Ryan’s R&E tax expert below to navigate the latest OBBBA changes, optimize deductions, and strategically plan your research investments.

Contact:
Violet Goodheart
Director
Ryan
violet.goodheart@ryan.com