Tax Alert: Permanent Restoration of Immediate Research Expensing Enacted
A key provision in the recently enacted tax reconciliation bill, the “One Big Beautiful Bill” (OBBB) Act, restores the immediate expensing of domestic research and experimental (R&E) expenses. This allows domestic R&E expenses to either be expensed in the year incurred or capitalized and amortized over a five-year period. Additionally, non-domestic R&E expenditures must be capitalized and amortized over a 15-year period. Taxpayers now have multiple pathways to obtain relief for expenses incurred and capitalized on their 2022 through 2024 tax filings.
Retroactive Relief for “Certain Small Businesses”
“Small businesses” are defined using the gross receipts test under IRC Section 448(c) in the OBBB. Businesses meeting the definition of “certain small businesses” have the option to elect retroactive treatment for tax years 2022 through 2024. To obtain retroactive relief amended tax returns for the affected periods will need to be filed.
Businesses that do not meet the criteria for “certain small businesses” have two options for handling the remaining unamortized expenses. Taxpayers may either deduct the full amount of unamortized expenses in the first tax year beginning after December 31, 2024; or they may deduct them ratably over the two-taxable year period beginning after December 31, 2024.
Considerations for Businesses
Retroactive relief provides small businesses with flexibility if unanticipated tax liabilities were incurred due to the impact of R&E expensing changes. However, businesses should also consider the administrative and compliance requirements for requesting such relief. Extended IRS processing times of amended returns may not generate timely cash flow benefits.
Both small and large businesses are afforded the opportunity to expense the unamortized R&E costs over a one- or two-year tax period. Therefore, careful analysis and forecast modeling should be considered. Immediate cash benefits may be realized by a reduction in 2025 estimated tax payments with a prospective application approach. This could provide a quicker realization of the cash flow benefits provided by the R&E expenditure relief.
Taxpayers should also consider the impact of other applicable tax provisions in the OBBB. The impact these decisions have with respect to a Taxpayer’s overall income level and effective tax rate, and their interaction with certain income-based limitations for new OBBB provisions, should be analyzed.
Conclusion
The OBBB provides welcome relief to taxpayers who incur R&E expenses and provides a sense of certainty as the changes enacted are permanent in nature. Flexibility is also provided with options to apply changes retroactively, for those businesses that qualify, or prospectively. For more information on OBBB’s provisions and implications for individuals and businesses, click here.
Please contact your tax professional or reach out to the GRF Tax Team if you have questions about how the newly enacted legislation may impact you or your business.
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If you have questions about the “One Big Beautiful Bill” (OBBB) Act, contact us.
