On July 4th, 2025 the President signed into law the One Big Beautiful Bill (OBBB) Act which has many positive aspects for the R&D credit and R&D expensing; notably, the key changes are:
The OBBB Act brings significant changes to how businesses can handle Research & Development (R&D) costs and these changes will affect your 2025 tax returns (for calendar year taxpayers) and offer opportunities for immediate expensing and potential recapture of prior R&D costs.
Immediate Expensing of R&D Costs
Starting with tax years after 12/31/24, businesses can immediately expense all R&D costs. This means that for calendar year taxpayers, these changes apply to 2025 tax year returns.
Benefits for “Small Businesses”
If your business qualifies as a “small business” under the Section 448(c) definition—meaning your average annual gross receipts for the prior three years (generally 2022-2024) are $31 million or less—you can:
Recapture and deduct all previously amortized Section 174 costs on your 2025 tax return. This allows you to claim these expenses that were previously spread out over your amortization schedule.
Benefits for Larger Businesses
Businesses that do not meet the “small business” definition can still benefit by:
Accelerating (deducting) any remaining Section 174 costs in 2025.
Alternatively, these businesses have the option to spread these remaining deductions over two years if preferred.
While these businesses cannot retroactively expense costs already amortized, they can deduct all outstanding amounts as of 2025 (or spread over 2 years).
Software Development Costs
A significant simplification is that software development costs are now explicitly classified as Section 174 items, making them eligible for immediate expensing. This eliminates the need to consult Rev. Proc. 2000-50 and related IRS guidance for these costs, potentially allowing clients to deduct more than previously claimed by a careful review of all software development costs.
Retroactive 280C Election and Amended Returns
The bill allows for a retroactive Section 280C election within one year of the bill’s enactment. This provision enables taxpayers to make changes on amended returns. Notably, businesses, especially small businesses looking to recapture Section 174 expenses, can change their original election decision (revoke a prior election) regarding Section 280C.
Undoubtedly, there will be IRS guidance issued along the way prior to the 2025 tax return season and we will post further updates but the expensing of R&D costs once again is welcome news and should encourage retaining R&D jobs here in the U.S.