R&D Amortization Repeal is Finally Here!

On July 3^rd, Congress passed the massive budget reconciliation bill that has been the subject of much debate for months. In the bill there are a number of business-friendly tax provisions, including an increase in the QBI deduction, return of 100% bonus depreciation and others. However, one of the most important parts of the Bill restores the ability to immediately deduct R&D expenses and makes this allowance retroactive for small businesses.

How did We Get Here?

In 2022, a measure of the first Trump tax law (TCJA) was allowed to come into effect requiring all companies to amortize R&D costs (spread the deduction out over 5 years). This removed the ability to deduct the wages, contractor costs, and other supplies that companies invest in R&D and resulted in higher tax bills. For three years now Congress has tried but failed to fix this issue.

The House version of the tax bill (the One Big Beautiful Bill Act) restored immediate R&D expense, but only for tax years 2025-2029. However, in an unexpected last-second move, the Senate worked to expand and protect the R&D provisions of the tax code.

Is Section 174 Amortization Repealed?

Major components of Section 174 are being repealed. Businesses will now have the option of deducting or amortize domestic R&D expenditure. However, foreign R&D costs must still be amortized over 15 years. This repeal will be a permanent part of the tax code, and it is unlikely that we will ever experience the forced amortization scenario again.

Can I file an amended return for past years?

For businesses with less than $31 million in average gross receipts, Christmas just came in July. The law will allow these businesses to go back and amend tax returns to undo amortization and deduct expenses. This will result in large refund checks for companies that were previously gouged for taxes on phantom income due to the amortization scheme.

What does this mean for the R&D Tax Credit?

While the R&D tax credit was never affected by amortization, this law makes the credit even more attractive. Under amortization, the credit only partially eased the pain from the tax increase. Now the R&D Credit is all upside for businesses engaged in qualified research.

What to do next?

The law contains language on what election needs to be made and the options for the amendment process. ATS can work with your CPA to determine the best approach to take advantage of the R&D incentives in this new bill based on each business’s unique situation.

For more information contact ATS today.