Can You Now Deduct Research and Experimental (R&E) Expenditures Under the One Big Beautiful Bill?

One of the key tax provisions in the One Big Beautiful Bill Act (OBBBA) is a provision that allows innovating companies to immediately deduct research and experimental (R&E) expenditures in tax years beginning January 1, 2025 or later. This largely reverts to the policy that was in place prior to the enactment of the Tax Cuts and Jobs Act in 2017, although there are some important changes of which businesses need to be aware. So, can your company fully deduct its R&E expenditures in 2025? Here are some important insights from Boston tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group:

3 Key Considerations for Deducting R&E Expenditures in 2025 (and Beyond)

While headlines have focused on the provisions in the OBBBA that allow innovative companies to immediately deduct R&E expenditures going forward, there are some important nuances that all companies need to be aware of. Given the risks of non-compliance, companies that plan to immediately deduct their R&E expenditures going forward will want to ensure that they are prepared to withstand IRS scrutiny if necessary as well. With this in mind, here are a few key considerations:

1. Not All R&E Expenditures Are Eligible for Immediate Deduction Under the OBBBA

First, and perhaps most importantly, not all R&E expenditures are eligible for immediate deduction starting in 2025. As a general matter, expenditures must satisfy a four-prong test in order to qualify as R&E expenditures under the Internal Revenue Code. Additionally, the OBBBA excludes certain R&E expenditures from immediate deduction eligibility—including expenditures incurred outside of the United States.

2. Companies Can Accelerate Deductions for Certain Past R&E Expenditures, Within Limits

Along with allowing the immediate deduction of qualifying R&E expenditures starting in 2025, the OBBBA also allows companies to accelerate their R&E deductions for qualifying expenditures from the 2022, 2023 and 2024 tax years. Special provisions for small businesses (those with average gross receipts of $31 million or less) allow these businesses to retroactively apply the OBBBA’s immediate deduction rule to qualifying R&E expenditures from these tax years as well.

3. Improperly Claiming R&E Expenditure Deductions Can Trigger IRS Scrutiny, Interest and Penalties

While the OBBBA’s R&E expenditure deduction rules provide opportunities for significant short-term tax savings, companies will need to be extremely careful to comply with these rules (which appear in new Section 174A of the Internal Revenue Code) going forward. Noncompliance will present a high risk for triggering an IRS audit; and, regardless of whether the IRS initiates an audit, improperly claiming R&E expenditure deductions can expose companies to substantial liability for interest and penalties.

Request a Call with Boston Tax Lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group

Do you need to know more about the new R&E expenditure deduction rules under the OBBBA? If so, we invite you to get in touch. To request a call with Boston tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, call 617-692-2989 or contact us confidentially online today.