Major Change: OBBBA and R&E Expense Deductions

Background: The Impact of the TCJA

Since 2022, the Tax Cuts and Jobs Act (TCJA) has required businesses to capitalize and amortize domestic research and experimental (R&E) expenses over five years, and foreign R&E expenses over fifteen years, instead of deducting them immediately. This shift significantly increased taxable income for many companies and limited the ability to reinvest in innovation. Business owners have long argued that the rule discouraged R&D spending, strained cash flow, and placed U.S. companies at a competitive disadvantage internationally.

OBBBA Restores Immediate Expensing for Domestic R&E

The OBBBA reverses this treatment. Starting with the 2025 tax year, domestic R&E expenses can once again be deducted immediately in the year they are paid or incurred, restoring a key incentive for innovation and growth. Foreign R&E costs, however, still remain subject to the 15-year amortization period.

Key Provisions and Planning Opportunities:

• Retroactive Relief for Small Businesses:
  • Businesses with average annual gross receipts under $31 million over the prior three years may apply the new rules retroactively to 2022 by filing amended returns.
• Catch-Up Deductions for All Businesses:
  • Companies may recover any remaining unamortized domestic R&E costs from 2022 – 2024 either entirely in 2025, or ratably over 2025 and 2026, offering flexibility in managing taxable income.
• Optional Amortization Election:
  • Taxpayers may still elect to amortize domestic R&E expenses over 60 months if that approach better aligns with their long-term tax strategy.

Deciding the Best Path Forward

The reinstatement of immediate expensing provides taxpayers with R&E expenditures a valuable opportunity to enhance cash flow and reduce current-year tax liabilities. Determining whether to take advantage of retroactive deductions, accelerate recovery, or elect amortization requires a careful review of your tax position, awareness of new deadlines, and coordination with other tax provisions.

Your Kirsch CPA Group advisor can help you determine the best strategy for your business, ensure you capture all eligible creds and deductions and keep you aligned with the latest IRS requirements.

Schedule an appointment to learn how we can support you

© Copyright 2025. All rights reserved.