Domestic R&E Deduction Returns Under Section 174A

On July 4, 2025, President Donald Trump signed into law the tax and budget bill known as the One Big Beautiful Bill (OBBB). Included in the sweeping law is a huge win for many taxpayers: the return of immediate expensing for domestic R&E expenditures. Additionally, the OBBB includes changes to Sections 41 and 280C, impacting the R&D tax credit.

New Section 174A

Effective for tax years beginning after Dec. 31, 2024, the new Section 174A rolls back the mandatory capitalization regime that was enacted by the Tax Cuts and Jobs Act of 2017 (TCJA) for tax years beginning after Dec. 31, 2022, but only for domestic R&E expenditures. Specifically, for tax years beginning after Dec. 31, 2024, taxpayers may select one of the following options with respect to domestic R&E expenditures:

• Fully deduct the expenditures when incurred under Section 174A(a)
• Elect to amortize the expenditures under Section 174A(c) over at least 60 months
• Take the optional 10-year write-off under Section 59(e)(2)(B)

Section 174A retains the definition of software development expenses as R&E expenditures without providing any additional clarity around the meaning of the term.

Crowe observation

Taxpayers need to continue distinguishing between domestic and foreign R&E expenditures, as foreign R&E expenditures remain subject to the 15-year amortization period under Section 174.

Changes to Section 41

For tax years before Jan. 1, 2025, Section 41(d)(1)(A) defined qualified research as research with respect to expenditures that “may” be treated as qualified research expenses (QREs) under Section 174. This allowed taxpayers to claim QREs for Section 41 purposes if they could be characterized as R&E expenditures, regardless of the specific characterization of the expenditures under Section 174.

The OBBB narrows the Section 41(d)(1)(A) definition of qualified research by limiting eligible QREs to expenditures that are treated as domestic R&E expenditures under Section 174A. Under the amended provision, it is imperative that taxpayers are properly accounting for domestic R&E under Section 174A for eligible expenditures to be qualified for the R&D tax credit.

Changes to Section 280C

Under the TCJA, Section 280C(c) required a taxpayer to reduce its deduction for R&E expenditures to the extent the R&D tax credit exceeded its Section 174 deduction attributable to QREs generating a credit. In most cases, the amount allowable under Section 174 as a deduction for the tax year for QREs was 10%, meaning the Section 41 credit could not exceed that amount. Therefore, in cases where Section 280C(c) applied, taxpayers were able to use the gross Section 41 credit without permanently reducing the amount charged to the Section 174 capital account.

Under the OBBB, for tax years beginning after Dec. 31, 2024, Section 280C(c)(1) requires taxpayers to reduce their domestic R&E deduction under Section 174A by the amount of any R&D tax credit claimed, unless the taxpayer elects to take a reduced R&D tax credit under Section 280C. This change eliminates the ability to claim the gross Section 41 R&D tax credit that could apply under TCJA. Therefore, under the OBBB’s amendment to Section 280C, most taxpayers will see a 21% reduction in their R&D credit benefits.

Transition rules

In lieu of implementing the Section 174A on a cut-off basis, which would require deducting domestic R&E expenditures in tax years beginning after Dec. 31, 2024, and continuing to amortize previously capitalized domestic R&E, the new law allows taxpayers to elect to deduct, either in the first tax year beginning after Dec. 31, 2024, or over two years (that is, either as a single deduction in 2025 or ratably over 2025 and 2026), any remaining unamortized domestic R&E expenditures.

Additionally, eligible small businesses can elect to retroactively apply the OBBB treatment of R&E expenditures to tax years beginning after Dec. 31, 2021, and file amended returns for all relevant tax years (2022 through 2024). The new law defines an eligible small business as one meeting the gross receipts test of Section 448(c) for the first tax year beginning after Dec. 31, 2024. The gross receipts test is satisfied if the taxpayer’s average annual gross receipts are $31 million or less over the three prior tax years. Eligible small businesses electing to apply these provisions retroactively are permitted to make a late reduced R&D credit election under Section 280C(c).

Guidance is expected to provide the procedures for complying with these provisions, including the requirements for making these elections. Form changes also are expected. However, with the wide-ranging tax impact of the OBBB and the significant amount of guidance that will be required to implement each of these provisions, timing for OBBB R&E and R&D guidance remains uncertain.

Crowe observation

Taxpayers should carefully evaluate the options provided to implement these provisions. Eligible small businesses should weigh the pros and cons between amending prior returns to claim deductions retroactively versus other options, such as electing to claim those deductions in 2025. Strategic planning will be critical to align deductions with broader tax objectives.

Looking Forward

For U.S. taxpayers engaged in R&E activities, Section 174A is a welcome and long-overdue correction. However, the need to distinguish between domestic and foreign R&E, maintain audit-ready documentation, and align deduction methodology with R&D credit claims remains critical.

The newly enacted Section 174A gives taxpayers a more favorable framework, but thoughtful planning and implementation, starting today, is key.