New rules create planning opportunities and decisions to make before filing.
After years of pushback from businesses across the country, Congress reversed one of the most unpopular provisions of the 2017 tax law.
Starting with your 2025 tax return, you can immediately expense domestic research and experimental (R&E) costs again, instead of spreading them over five years.
If your business invests in developing new products, improving processes, or building proprietary systems, this change could significantly reduce your 2025 tax bill. But it also requires some planning to get right.
What Changed
The One Big Beautiful Bill Act (OBBB) created a new Section 174A that lets businesses fully deduct U.S.-based R&E spending in the year it’s incurred, just like you could before 2022.
Here’s what you need to know:
For domestic R&E costs (U.S.-based spending):
- Immediately deductible in 2025 and going forward
- You can also “catch up” on R&E costs you had to capitalize in 2022-2024
- Or you can amortize remaining amounts over two years if that makes more sense
For foreign R&E costs (non-U.S. spending):
- Still must be capitalized and amortized over 15 years
- No change from current rules
The IRS provided a simplified process in Rev. Proc. 2025-28. In many cases you can attach a return statement in lieu of filing Form 3115 to adopt §174A or make certain elections; details and exceptions are in the procedure.
Your Three Options for Handling Past R&E Costs
If you’ve been capitalizing R&E costs since 2022, you now have choices for how to handle those unamortized amounts:
Option 1: Deduct everything in 2025
Take all remaining unamortized R&E as a deduction this year.
- Best for: Businesses with unusually high income in 2025, had a banner year, or have income you need to offset.
- Watch out for: Creating a large loss that might not be fully usable due to NOL limitations (losses can only offset 80% of future income).
Option 2: Spread it across 2025 and 2026
Deduct half this year, half next year.
- Best for: Businesses with consistent income who want to smooth out the tax impact without creating a big loss one year.
- Watch out for: If you expect substantially higher income in 2026, you might prefer more deduction then.
Option 3: Keep the old amortization schedule
Continue deducting R&E over the original five-year schedule.
- Best for: Businesses that want predictability and steady expense recognition, or those already planning around the existing schedule.
- Watch out for: Leaving money on the table if you have income to offset now.
Who This Affects (It’s Broader Than You Think)
This isn’t just for pharmaceutical companies or Silicon Valley startups. R&E spending includes a much broader range of activities than most business owners realize.
You’re probably doing R&E if you’re:
Manufacturing businesses:
- Developing new production processes
- Designing custom tooling or fixtures
- Creating prototypes for new product lines
- Improving manufacturing efficiency through process redesign
Technology and software companies:
- Developing new software or applications
- Creating algorithms or proprietary systems
- Building custom integrations or platforms
Agricultural businesses:
- Testing new farming methods or equipment
- Developing specialized seed treatments
- Innovating in precision agriculture technology
Construction and engineering:
- Designing new building techniques
- Developing specialized equipment or tools
- Creating custom solutions for unique projects
Service businesses:
- Building proprietary systems or methodologies
- Developing new service delivery processes
- Creating automated tools or platforms
The key is that you’re trying to discover information that eliminates uncertainty about developing or improving a product or process. If there’s technical uncertainty and you’re working to resolve it, that’s likely R&E.
Why This Isn’t as Simple as “Take the Deduction”
Immediate expensing sounds like an obvious win. But depending on your business structure and tax situation, it can create complications:
- Net Operating Losses (NOLs): If deducting all your R&E creates a loss, that loss can only offset 80% of future income. The other 20% of future income still gets taxed, meaning you don’t get full value from the loss.
- Alternative Minimum Tax (AMT) and BEAT (large C corps): For some businesses, lowering regular taxable income too much can trigger alternative tax calculations that don’t go away with more deductions.
- Bonus Depreciation Interaction: The OBBB also brought back 100% bonus depreciation for property placed in service after January 1, 2025. If you’re planning significant equipment purchases this year, you need to think about both deductions together. Taking both immediately could create a large loss. Spreading them might give you more usable deductions over time.
- Interest Expense Limitations (Section 163(j)): R&E expensing changes your adjusted taxable income calculation, which can affect how much interest expense you can deduct. For businesses with significant debt, this interaction matters.
- Pass-Through Entity Considerations: If you’re an S-Corp, partnership, or LLC owner, this flows to your personal return. Your individual tax situation—other income sources, state taxes, QBI deduction—affects which option makes the most sense.
This is why modeling matters. The “biggest deduction” isn’t always the best answer.
What Kansas Business Owners Should Do Now
- Identify your R&E costs
Review 2022-2024 to determine what you’ve been capitalizing. Many businesses have more qualifying R&E than they realize.
Don’t assume you need a lab coat and test tubes. If you’re developing something new or significantly improving something existing through experimentation, it might qualify.
- Look at your 2025 income picture
- Do you expect higher or lower income than usual?
- Are you making other major purchases (equipment, vehicles, property)?
- Do you have other deductions coming (bonus depreciation, large expenses)?
- Are you planning any major transactions (sales, acquisitions)?
- Model the different scenarios
Don’t guess. Run the numbers for each option:
- What’s your tax bill under each approach?
- How do NOL carryforwards work in your situation?
- What’s the cash flow impact this year vs. next?
- How does this interact with your overall tax strategy?
- Coordinate with year-end planning
R&E expensing doesn’t happen in isolation. It affects:
- Equipment purchase timing
- Bonus and distribution planning
- Estimated tax payments
- State tax implications (states may not follow federal treatment)
- Document everything
Keep clear records distinguishing:
- Domestic vs. foreign R&E costs
- What specific activities qualified
- The business purpose and uncertainty being resolved
- The experimental process used
Good documentation protects you if questions come up later.
How CGP Group Helps
The return of R&E expensing is genuinely good news for Kansas businesses investing in innovation. But like most tax provisions, the value is in the execution.
The best approach depends on your specific situation:
- Your income patterns
- Your business structure
- Your other deductions and plans
- Your long-term strategy
Don’t default to the “obvious” choice without modeling it. And don’t wait until filing season to think about it.
We work with Kansas manufacturers, technology companies, agricultural businesses, and other innovators who invest in developing their operations.
Ready to understand how R&E expensing affects your business? Contact us to discuss your situation.
