Practical Sec. 174A tax planning in the post-OBBBA landscape

Editor: Jeffrey N. Bilsky, CPA

In enacting new Sec. 174A in the law known as the One Big Beautiful Bill Act (OBBBA), H.R. 1, P.L. 119–21, Congress brought the highly anticipated return of immediate expensing for domestic research and experimental (R&E) expenditures. In returning flexibility to the treatment of domestic R&E, Sec. 174A also brings new, multivariable planning challenges for taxpayers and interpretive challenges for practitioners.

This item explores the implications taxpayers’ domestic R&E choices can have on the broader tax landscape, highlights some ambiguity in new Sec. 174A, and offers practical suggestions for tackling related planning challenges.

Before turning to planning, two scope limitations are worth noting. First, legacy Sec. 174 continues to mandate the capitalization and 15–year amortization of foreign R&E. While interpretive questions persist, this item does not address foreign R&E. Second, new Sec. 174A applies to tax years beginning after Dec. 31, 2024; however, small business taxpayers can elect to retroactively apply new Sec. 174A for tax years beginning after Dec. 31, 2021. The myriad considerations for that election are likewise outside the scope of this discussion.

Cost-recovery options for domestic R&E after the OBBBA

Immediate deduction under Sec. 174A(a): For tax years beginning after Dec. 31, 2024, taxpayers can change to the Sec. 174A(a) deduction method, which allows for the immediate deduction of domestic R&E costs as incurred. Rev. Proc. 2025–28 sets forth the procedures for effectuating that change.

In addition to that change in method of accounting for prospective costs, taxpayers can elect to immediately recover their remaining unamortized amount of domestic R&E costs capitalized in tax years beginning after Dec. 31, 2021, and before Jan. 1, 2025. Under that method, the amount can be recovered in full in the first tax year beginning after Dec. 31, 2024, or ratably over two tax years, starting with the first tax year beginning after Dec. 31, 2024.

Voluntary capitalization under Sec. 174A(c): After the OBBBA, taxpayers have two options for the voluntary capitalization of domestic R&E.

First, Sec. 174A(c) provides for the capitalization and amortization of such costs ratably over a period of no less than 60 months, beginning with the month the taxpayer first realizes benefits from the expenditures. That provision presents many interpretive challenges. Most notably, questions exist regarding the impact of the “part or all of such expenditures” language in Sec. 174A(c)(2). Such questions cast doubt as to whether the nature of the provision is actually that of an annual or project–based election, despite early procedural rules in Rev. Proc. 2025–28 suggesting treatment as a solitary method of accounting applicable to all domestic R&E.

Sec. 174A(c) also carries fact–based interpretive challenges. As noted above, taxpayers begin amortizing costs capitalized under Sec. 174A(c) in the month they first realize benefits from the expenditures. Many R&E fact patterns do not present one obvious first period in which benefits from R&E expenditures begin to accrete. Until Treasury and the IRS release substantive guidance on Sec. 174A(c), taxpayers that want to avoid ambiguity should strongly consider the longer–term but more settled capitalization approach in Sec. 59(e).

Voluntary capitalization under Sec. 59(e): Despite new Sec. 174A(c), taxpayers can still elect to capitalize domestic R&E under Sec. 59(e). Subject to the ambiguities discussed above, the key difference between those options is their flexibilities: recovery period versus amount capitalized. Under Sec. 59(e), a taxpayer can elect to capitalize and amortize a specified amount of R&E costs, which offers taxpayers the ability to precisely tailor the amount capitalized in a given tax year. However, the trade–off is a set 10–year recovery period (in contrast to the Sec. 174A(c) flexibility of 60 months or more).

A taxpayer intending to elect capitalization under Sec. 59(e) would follow the procedures in Rev. Proc. 2025–28 to adopt the Sec. 174A(a) deduction method as its underlying method for domestic R&E and then layer on the annual Sec. 59(e) election, following the procedures of Regs. Sec. 1.59–1(b).

Impact of Sec. 174A planning on other tax items

A taxpayer’s course of action for the treatment of domestic R&E costs for tax years beginning in 2025 has the potential for unforeseen — and unfavorable — effects on other federal tax issues.

Sec. 163(j): A common interaction taxpayers face in the post–OBBBA environment is between R&E costs and the Sec. 163(j) limitation on business interest expense. Absent an applicable exception, Sec. 163(j) limits taxpayers’ ability to immediately deduct business interest expense. Business interest expense not allowed as a current deduction is carried forward to future years. The annual Sec. 163(j) limitation generally is equal to the sum of business interest income plus 30% of adjusted taxable income (ATI). The starting point for ATI is a taxpayer’s federal taxable income, with some modifications (see also “Sec. 163(j) After OBBBA: Leveraging Cost–Recovery Accounting Methods“).

For tax years beginning in 2022 through 2024, Sec. 163(j) amended the computation of ATI to include deductions of cost–recovery amounts such as depreciation, amortization, and depletion. Because that generally resulted in lower ATI, taxpayers not previously subject to Sec. 163(j) might have found themselves affected by the limitation, and taxpayers already affected faced even greater disallowed interest deductions. Because the mandatory capitalization and amortization of R&E expenditures under legacy Sec. 174 also began in that same time, many taxpayers have yet to encounter any interaction between the amortization of R&E costs and Sec. 163(j) interest limitations.

For tax years beginning after Dec. 31, 2024, the OBBBA amended Sec. 163(j) to reinstate an addback to ATI for depreciation, amortization, and depletion. As a result, taxpayers that voluntarily capitalize and amortize domestic R&E costs will have a higher ATI and interest deductibility ceiling (and thus face a reduced limitation on the deduction of business interest expense) than taxpayers that choose to deduct domestic R&E costs as incurred.

Because the ability to deduct Sec. 163(j) interest carryforwards depends on future taxable income, taxpayers may be uncertain when — or whether — they will see a benefit from those amounts. That uncertainty contrasts starkly against the predictability of either capitalization option for domestic R&E. Given the yet–unresolved interpretive challenges of Sec. 174A(c), the option with the most certainty might be a Sec. 59(e) election, which allows a taxpayer to capitalize only so much of its domestic R&E costs as is necessary to achieve its present Sec. 163(j) goals while accurately projecting future deductions across the statutory 10–year amortization period.

With the OBBBA’s ATI changes now in effect, taxpayers subject — or potentially subject — to Sec. 163(j) might prefer amortizing domestic R&E costs over immediate expensing under Sec. 174A(a), trading predictable deductions for the uncertain realization of interest carryforwards tied to future ATI.

Net operating losses: Under Sec. 172, any net operating losses (NOLs) generated generally can be used to offset up to 80% of a taxpayer’s federal taxable income in a future tax year (the actual availability of NOLs is complex and depends on many factors, such as when the NOL was incurred or past ownership changes). As a result, as with the carryforwards discussed under Sec. 163(j), taxpayers might find themselves uncertain as to when — or whether — they will see the full benefit of their NOLs.

That issue poses another instance in which the Sec. 174A(a) method of expensing domestic R&E costs under the OBBBA might not be the optimal treatment. Rather, voluntarily capitalizing and amortizing domestic R&E costs to limit the generation of a new or larger NOL might be preferable in specific circumstances. That said, taxpayers should carefully model future scenarios to be sure the recovery of domestic R&E costs through amortization does not occur over such an extended time horizon that the deferral of deductions eliminates the benefit of mitigating the creation of 80%-limited NOLs.

As such, the Sec. 174A(c) option to select a recovery period that is greater than 60 months but less than the 10 years required by Sec. 59(e) could prove optimal for some taxpayers. However, until substantive guidance is released, that flexibility should be weighed against the interpretive challenges facing Sec. 174A(c), as discussed above.

The corporate alternative minimum tax: The corporate alternative minimum tax (CAMT) is a minimum 15% tax on the financial statement income (with specified adjustments) of certain large corporations (applicable corporations). An applicable corporation owes CAMT if its CAMT tentative minimum tax exceeds its regular tax plus the Sec. 59A base–erosion and anti–abuse tax (BEAT). As with any large deduction, expensing domestic R&E costs under Sec. 174A(a) might reduce an applicable corporation’s regular tax liability and BEAT below its tentative minimum tax and cause it to have a CAMT liability. While paying CAMT does generate a credit for future use, some applicable corporations might question their ability to fully use those credits or prefer to avoid application of the CAMT regime for other reasons.

CAMT applicability is difficult to forecast, being driven by both changes in regular taxable income and adjusted financial statement income. To mitigate CAMT exposure, a taxpayer can increase its federal tax liability in current periods by deferring the recovery of domestic R&E costs. The Sec. 59(e) election could prove beneficial in its ability to defer only so much of domestic R&E expenditures as is necessary to avoid triggering a CAMT liability.

BEAT: The BEAT regime under Sec. 59A, which applies to some large corporations that make payments to foreign related parties, is also a minimum tax. The BEAT compares a taxpayer’s regular federal income tax to an amount equal to a specified rate of modified taxable income — currently 10%, increasing to 10.5% for tax years beginning after Dec. 31, 2025, under the OBBBA. The modified taxable income is a taxpayer’s regular federal taxable income adjusted to remove some base–erosion tax benefits (some deductions for payments to foreign related parties and other related items).

Like the CAMT, because the BEAT is a minimum tax, an incremental BEAT liability might be triggered as a result of a taxpayer’s regular federal tax liability being reduced by significant current deductions, such as those generated by the Sec. 174A(a) expensing method. As with the CAMT, voluntary capitalization of domestic R&E under Sec. 59(e) might provide the most flexible and narrowly tailored planning to reduce the likelihood that the BEAT will apply in a specific tax year.

Implementation considerations with Sec. 174A methods and Sec. 59(e)

On determining the preferred treatment for domestic R&E costs, taxpayers should consult Rev. Procs. 2025–23 and 2025–28 for implementation guidance, specifically, that related to the ability to file a statement in lieu of Form 3115, Application for Change in Accounting Method, to implement Sec. 174A(a) and 174A(c) methods for the 2025 tax year. Further, taxpayers combining a Sec. 174A(a) method change with a Sec. 59(e) election should reference the election statement requirements in Regs. Sec. 1.59–1. Partnerships and S corporations should also note that under Sec. 59(e)(4)(C), each partner or S corporation shareholder makes the Sec. 59(e) election separately with respect to the owner’s allocable share of qualified expenditures.

Taxpayers face a multitude of complex planning exercises for tax year 2025 and beyond in determining the optimal treatment of domestic R&E costs as a result of the OBBBA. While the Sec. 174A(a) ability to immediately deduct domestic R&E costs appears beneficial on its face, this item has explored a limited, nonexhaustive set of seemingly unrelated federal tax issues that can yield detrimental results if domestic R&E expenditures are deducted as incurred.

Editor

Jeffrey N. Bilsky, CPA, is managing principal, Washington National Tax, with BDO USA, P.C. in Atlanta.

For additional information about these items, contact Bilsky at jbilsky@bdo.com.

Contributors are members of or associated with BDO USA, P.C.