Can I deduct all my R&D costs in 2025 under the OBBBA?

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A: Yes, the One Big Beautiful Bill Act (OBBBA) fundamentally changes the tax treatment of R&D costs for 2025 and beyond, allowing most businesses to fully expense domestic research and experimental (R&E) expenditures in the year incurred. However, there are important nuances, options, and compliance requirements to consider, especially regarding the treatment of software development costs, the interaction with research development tax credits, and the application of new IRS guidance. Below, we break down the key rules and planning considerations for 2025.

1. Full Expensing of Domestic R&D Costs in 2025

Immediate Deduction:
For tax years beginning after December 31, 2024, new Section 174A allows taxpayers to fully expense domestic R&D costs in the year they are paid or incurred. This reverses the Tax Cuts and Jobs Act (TCJA) rule that required capitalization and amortization of these costs over five years. Now, you can deduct qualifying domestic R&D expenditures; including wages, supplies, and contract research immediately, providing a significant cash flow benefit and simplifying tax compliance for many businesses.

Section 174 Expenses Examples:

• Salaries of engineers and scientists working on new product development
• Supplies used in laboratory research
• Costs of developing new manufacturing processes

Foreign R&D Costs:
R&D costs attributable to foreign research must still be capitalized and amortized over 15 years under Section 174. No immediate deduction is allowed for these expenditures.

2. Treatment of Software Development Costs

Amortization of Software Development Costs:
The OBBBA clarifies that software development costs are treated as R&E expenditures. For domestic software development, you may fully expense these costs in 2025 under Section 174A, or you may elect to capitalize and amortize them over a period of at least 60 months, beginning with the month you first realize benefits from the software.

Election to Amortize:
If you prefer to match deductions with future income or manage taxable income, you can elect to capitalize and amortize domestic R&D costs (including software) over a period of not less than 60 months. This election must be made by the due date (including extensions) of your tax return and, once made, applies to all subsequent years unless changed with IRS approval.

3. Transition Relief for Previously Capitalized R&D Costs

Deduction of Unamortized Amounts:
If you capitalized domestic R&D costs in 2022–2024 under the TCJA rules and still have unamortized balances, the OBBBA allows you to:

• Deduct the entire remaining balance in 2025, or
• Amortize the remainder over two years (2025 and 2026)

This provides flexibility to accelerate deductions and potentially generate refunds or offset current-year income.

Small Business Retroactivity:
Eligible small businesses (generally, those with average annual gross receipts of $31 million or less for 2025) may elect to apply the new expensing rules retroactively to 2022–2024. This requires filing amended returns and can unlock refunds for prior years, but also requires careful coordination with owners and partners in pass-through entities.

4. Interaction with R&D Tax Credits

R&D Credit Limitation:
The OBBBA amends Section 280C(c) to require that any deduction for domestic R&D costs be reduced by the amount of the research credit claimed under Section 41. Alternatively, you may elect a reduced credit, which avoids reducing your deduction but results in a smaller credit. This is consistent with pre-TCJA practice and is designed to prevent a double tax benefit.

Section 174A and Section 41 Coordination:
To claim R&D tax credits, your expenditures must be treated as domestic R&E expenses under Section 174A. This is a stricter requirement than prior law and may require changes to your accounting methods or documentation.

5. IRS Update and Compliance

The IRS has issued Rev. Proc. 2025-28, which provides detailed procedures for making elections, changing accounting methods, and complying with the new rules. For most taxpayers, adopting Section 174A expensing is treated as a change in method of accounting, implemented on a cut-off basis (no Section 481(a) adjustment for prior years). The IRS also provides relief for taxpayers who already filed 2024 returns, allowing superseding returns or amended returns to make the necessary elections.

State Tax Considerations:
Not all states conform to federal changes automatically. Some states may still require capitalization and amortization of R&D costs, so multistate businesses should review state conformity rules and adjust their filings accordingly.

6. Strategic Planning and Modeling

Expense R&D or Amortize?
The choice between immediate expensing and amortization of R&D costs should be modeled carefully. Immediate expensing can reduce taxable income and generate cash tax savings, but may also affect other tax attributes, such as net operating losses. Amortization may be preferable if you expect higher income in future years.

Conclusion:
For 2025, most businesses can fully expense their domestic R&D costs under the OBBBA, including software development costs, but must coordinate this with their R&D tax credits and comply with new IRS procedures. Foreign R&D costs remain subject to 15-year amortization. Small businesses have additional retroactive options, and all taxpayers should carefully model the impact of their choices on overall tax liability and compliance. Consult with your tax advisor to ensure optimal treatment and compliance with both federal and state rules.

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