Making Sense of the New IRS Guidance on R&E Expenses

Big changes are coming to how businesses handle research and experimental (R&E) expenses, thanks to the One Big Beautiful Bill Act (OBBBA). This act has reinstated immediate deductions for these costs, and the IRS recently released new guidance (Revenue Procedure 2025-28) on how to navigate these changes.

This isn't just technical jargon; it's a shift that could significantly impact your company's bottom line. We've broken down what businesses of all sizes need to know.

What Are R&E Expenditures?

First, let's clarify what we're talking about. R&E expenditures are essentially the costs of research and development in a laboratory or experimental sense. Think of the expenses related to discovering information that helps you develop a new product or improve an existing one.

The Big Change: Immediate Deductions are Back

Since 2022, the Tax Cuts and Jobs Act (TCJA) has forced businesses to amortize (spread out) their domestic R&E costs over five years. The OBBBA reverses this, bringing back the pre-TCJA treatment. For expenses incurred in tax years beginning after 2024, you can once again deduct these costs immediately.

This is a major win for businesses, freeing up cash flow and simplifying tax strategy.

Special Provisions You Shouldn't Overlook

The new guidance includes some crucial details for different types of businesses.

Retroactive Deductions for Small Businesses

If you run a small business, this part is for you. The OBBBA allows businesses that meet a gross receipts test (for 2025, this means average annual gross receipts of $31 million or less for the previous three years) to claim the R&E deduction retroactively to 2022.

How you make this election depends on whether you've already filed your 2024 tax return. You might be able to file a superseded or amended return to take advantage of this. The key is to act within the specified deadlines to either expense the costs or make an accounting method change with a "true-up" adjustment.

Accelerated Deductions for All Businesses

For any business with unamortized domestic R&E expenses from 2022-2024, you now have a choice. You can elect to recover those remaining expenses all at once on your 2025 return, or spread them over your 2025 and 2026 returns.

This provides a powerful opportunity to accelerate your deductions and improve your financial position.

Important Considerations for Your Tax Strategy

Claiming the immediate deduction isn't always the best move for every business. Here are a couple of strategic points to consider:

The Business Interest Expense Deduction

The IRS guidance suggests that the accelerated R&E deduction will be treated as an amortization expense. Why does this matter? The business interest deduction is generally limited to 30% of your adjusted taxable income (ATI). Starting in 2025, ATI will be calculated before deductions for amortization.

This means that classifying your R&E deduction as amortization could increase your ATI, allowing for a larger business interest deduction. It’s a complex interplay, but one that could yield significant tax savings.

The R&E Tax Credit

You can't double-dip by claiming both the R&E deduction and the R&E tax credit for the same expense. The OBBBA simplifies the rule: your deduction is reduced by the full amount of the research credit you claim.

However, you can still elect to take a reduced credit to preserve your full deduction. Small businesses also have new flexibility to make late elections regarding this choice.

We're Here to Help You Navigate the Changes

The new IRS guidance brings welcome relief but also introduces new layers of complexity. From choosing between immediate deductions and capitalization to navigating the interplay with other tax provisions, making the right decision requires careful analysis.

You don't have to figure this out alone. Our team at SD Mayer & Associates is here to help you understand how these changes affect your specific situation and develop a strategy that optimizes your tax position.