Overview of R&E Expense Deductibility under Proposed Federal Legislation
Posted by Kristin Re’ on June 16, 2025
Please note that the articles dated June 2025 reflect proposed tax legislation as it stood at the time of publication.
The treatment of research and experimental (R&E) expenses is a critical issue for U.S. businesses, particularly small to midsize companies that focus on innovation. Historically, under Section 174 of the Internal Revenue Code, taxpayers could deduct R&E expenses in the year they were incurred. This provision encouraged investment in innovation by allowing companies to realize a current tax benefit for eligible costs.
Changes Introduced by the Tax Cuts and Jobs Act (TCJA)
However, starting in 2022, the TCJA altered these rules significantly. Under the TCJA, R&E expenses must be capitalized and amortized over five years for domestic activities and 15 years for foreign activities. This change means that businesses can no longer take an immediate deduction for their research spending, leading to financial strain for companies that previously benefited from immediate expensing.
Practical Impact on Businesses
The shift from immediate expensing to amortization has had a substantial impact on startups, tech firms, and manufacturers. These companies have reported significant tax hikes, even in years when they operated at a loss. The new amortization requirement has created cash flow issues for innovation-heavy firms and has complicated tax reporting and long-term forecasting. As a result, lobbying groups, tax professionals, and industry associations have been advocating for the reversal of the TCJA’s Section 174 provisions since they took effect.
The One, Big, Beautiful Bill Act
The One, Big, Beautiful Bill Act is a comprehensive tax and spending package that narrowly passed in the U.S. House in May. One of its key provisions is the restoration of the immediate deductibility of R&E expenses. Specifically, the bill would allow taxpayers to immediately deduct domestic R&E expenditures paid or incurred in taxable years beginning after December 31, 2024, and before January 1, 2030. This provision aims to alleviate the financial burden on businesses caused by the amortization requirement and to encourage further investment in innovation.
Legislative Outlook and Next Steps
The passage of the current version of The One, Big, Beautiful Bill Act remains uncertain. The bill is currently being debated in the U.S. Senate, where senators have indicated a desire to make changes to some of its provisions. If the bill is revised, it will need to go back to the House for another vote before it can be signed into law by President Trump.
Despite the uncertainty, the bill offers hope that lawmakers recognize the challenges businesses face and may be willing to act. If enacted, the bill could restore financial flexibility to innovators across the country, encouraging a new wave of research, development, and economic growth.
Conclusion
The One, Big, Beautiful Bill Act represents a significant potential change in the tax treatment of R&E expenses. By restoring the immediate deductibility of these expenses, the bill aims to support innovation and alleviate financial strain on businesses. As the legislative process continues, businesses should stay informed about the bill's progress and consider how these potential changes may affect their operations.
Reach out to our expert team if you have any questions or need further assistance regarding these potential changes and their impact on your business.
Please note that the tax law discussed in this article is currently proposed and has not yet been enacted.
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As a principal in our tax department, Kristin serves businesses and individuals. She works primarily with commercial entities in a variety of industries, including Partnerships, S-Corporations, and C-Corporations. She has also worked extensively with manufacturers and start-up companies. Kristin helps companies obtain various tax incentives to reduce tax liability and improve cash flow. Her focus is on various federal, state, and local business development incentives, including Start-Up New York, Excelsior Jobs Program, New York State Film Tax credits, and Federal Research and Development tax credits. She is involved with Firm recruitment and hiring, is a member of the Lumsden Manufacturing team, and serves as co-chair of the Firm R&D tax credit department.