The long-awaited repeal of mandatory Research and Experimental amortization is finally here. With the passage of the One Big Beautiful Bill Act (OBBBA), businesses can once again immediately expense domestic Research and Experimental (R&E) costs under Section 174 of the Internal Revenue Code.
This change may feel like a return to normal—but for many taxpayers, particularly those with existing capitalized expenses or prior-year compliance burdens, the planning decisions are just beginning. At Aura Advisors, we see this as a chance not only for relief, but for strategy.
What’s Changed Under the OBBBA?
Starting in tax years after December 31, 2024, U.S. taxpayers can fully deduct domestic Section 174 expenses in the year incurred. That means no more five-year amortization period imposed by the 2017 Tax Cuts and Jobs Act (TCJA)—a change that heavily impacted software companies, life sciences innovators, and early-stage startups.
Key provisions of the OBBBA include:
- Full expensing of domestic R&E starting in 2025 (permanently, not temporarily)
- Continued capitalization of foreign R&E expenditures over 15 years
- Multiple options for how to handle previously capitalized Section 174 amounts
Four Strategic Paths for Previously Capitalized 174 Costs
If your company capitalized domestic R&E costs from 2022 to 2024, you now have options. Each path comes with its own cash flow, compliance, and tax attribute considerations:
- Expense 174 amounts fully in 2025
Elect to deduct all unamortized domestic R&E costs in one shot. This may generate significant deductions—but may negatively impact the usage of net operating losses (NOLs) if the Company has triggered Section 382 ownership changes.
- Expense over 2025 and 2026
Spread the unamortized deduction evenly over two years. This offers a softer impact on current-year taxable income and may help manage Section 382 risk or optimize credit usage.
- Amend 2022–2024 returns (if eligible as a small business)
If your company averaged less than $31 million in gross receipts over the past three years, you may elect to undo prior-year capitalization entirely. This creates refund opportunities but may require amended return filings and enhanced substantiation. Further guidance is expected to clarify how prior income taxes paid can be claimed and whether amended returns are needed.
- Allow amortization to continue
Businesses may simply stay the course and allow prior-year capitalization to run off. In some cases—particularly where Section 382 limitations apply, or where past deductions would have been wasted—this may be the smarter choice.
When More Isn’t Always Better: The Section 382 Trap
For companies with significant net operating losses (NOLs) or who have experienced ownership changes, it’s critical to evaluate the impact of Section 382 limitations before accelerating deductions.
Triggering a large one-time deduction could limit the usability of NOLs or R&D credits, reducing the long-term tax benefit. In some cases, allowing the amortization to continue may better preserve valuable attributes.
Compliance Is Easier—But Not Effortless
While the OBBBA simplifies the treatment of Section 174 expenses, companies still need to:
- Substantiate domestic R&D for Section 41 credit purposes
- Accurately separate foreign vs. domestic R&E, especially when using global contractors or offshore teams
The IRS has not yet released specific guidance on amended return filings for small businesses, so further clarity is expected.
What Companies Should Do Now
This change is not just a compliance adjustment—it’s a planning opportunity. Depending on your facts, the right course of action may involve modeling multiple options across several tax years. Here’s how to begin:
- Evaluate your 2022–2024 174 capitalization: Quantify amounts still being amortized.
- Project 2025–2026 taxable income: Understand how deductions will impact your effective tax rate and attribute usage.
- Review your ownership history: Assess whether Section 382 limitations could apply.
- Segment foreign R&E costs: Ensure continued compliance with capitalization rules for offshore work.
- Consider amended returns: For small businesses, early action could unlock refunds before the 2026 deadline.
Our Take: Relief That Requires Precision
At Aura Advisors, we believe strategy starts where compliance ends. The restoration of full domestic R&E expensing is a welcome reprieve—but it’s not one-size-fits-all. We’re guiding clients through multi-year analyses to determine whether accelerating deductions improves their overall tax profile or puts other benefits at risk.
If your company invests in software, biotech, engineering, or design—and especially if you’ve experienced ownership changes—now is the time to revisit your Section 174 strategy.
To discuss the impact on your business’ tax position, reach out today.
Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.