TLDR: The new "One Big Beautiful Bill Act" (OBBBA) reverses the rigid R&E capitalization rules from the TCJA, putting cash back into innovative businesses.
Key Highlights:
- Starting 2025: You can immediately deduct 100% of your domestic R&E expenses again.
- Small Businesses (under $31M gross receipts): Can retroactively expense R&E from 2022-2024 by filing amended returns (think potential refunds!).
- All Other Businesses (2022-2024): Can deduct remaining unamortized R&E from these years fully in 2025, or over two years.
- Foreign R&E: Still amortized over 15 years.
- R&D Tax Credit: Now even more beneficial with immediate expensing.
Hey there, innovation enthusiasts!
If you’ve been feeling the pinch from those R&E (Research & Experimental) expense capitalization rules over the past few years, prepare for some fantastic news. The recently passed "One Big Beautiful Bill Act" (OBBBA) is a game-changer, bringing back a much-loved tax break that’s set to put cash back into the pockets of innovative businesses like yours.
For a while now, many of us have been grappling with the Tax Cuts and Jobs Act (TCJA) requirements that kicked in after 2021, forcing companies to capitalize and amortize domestic R&E expenses over five years (or even 15 for foreign R&E). This meant less money upfront for businesses pouring funds into R&D, impacting cash flow and often leading to higher taxable income. It was a tough pill to swallow for companies committed to pushing boundaries.
But the tide has turned! The OBBBA, signed into law by President Trump, directly addresses these challenges and offers significant relief.
The Big Takeaways from the OBBBA:
- Immediate Expensing is Back (and Better!): For tax years starting after December 31, 2024, you can once again elect to immediately deduct 100% of your domestic R&E costs in the year they're incurred. This is a massive win for your cash flow and ability to reinvest in future projects!
- Retroactive Relief for Small Businesses: This is where it gets exciting for many of our readers! Suppose your business typically has average annual gross receipts not exceeding $31 million. In that case, you can retroactively apply full expensing to R & E costs all the way back to tax years beginning after December 31, 2021. Think refund checks for 2022, 2023, and 2024 by filing amended returns!
- Accelerated Amortization for Everyone Else (2022-2024 Catch-Up): Even if you're a larger business or don't qualify for the small business retroactive expensing, you're not left out. If you've been diligently capitalizing R&E expenses between 2022 and 2024, you can now elect to deduct the remaining unamortized amounts in full in your first tax year after 2024 (hello, 2025 tax return!). Or even spread it evenly over two years (2025 and 2026). This offers a significant acceleration of those deductions.
- Foreign R&E Still Plays by Different Rules: It's important to note that while domestic R&E gets this great relief, foreign R&E costs will continue to be capitalized and amortized over 15 years. This reinforces the focus on incentivizing research and development right here at home.
- R&D Tax Credit Just Got More Powerful: The R&D tax credit (Section 41) always stood on its own, but with immediate expensing back in play, the overall benefit of conducting R&D just became even more compelling. The law also includes clarifications around coordination with the credit.
- Simplified Accounting Method Changes: The IRS has made it easier to switch your accounting methods to reflect these new R&E rules, generally providing automatic consent for the necessary changes.
Don't wait! If you've invested in research and development, especially in the last few years, this bill is designed to help you. Reach out to the experts at the arbo team at support@arbohq.com if you need help navigating the impact on your returns.
We're incredibly excited about this positive change and what it means for your business's growth and innovation!
