Key Takeaways
- The One Big Beautiful Bill Act restored immediate expensing for domestic research costs, but it did not close out Section 174. New Section 174A allows the current deduction of domestic research and experimental expenditures going forward. Companies treating the fix as the end of the matter tend to miss issues that still affect compliance, cash flow, and transaction readiness.
- Previously capitalized domestic R&D costs do not disappear, and the choice of recovery method is a matter of judgment. Many companies still carry capitalized research costs from tax years beginning after December 31, 2021. The legislation provides transition rules for recovering those amounts, and the right approach depends on the company’s specific facts and tax profile.
- Foreign research expenditures remain subject to capitalization and amortization under Section 174. This is the most common misconception about the new law. As growth companies build offshore engineering teams or outsource development, the line between domestic and foreign research determines federal tax treatment, which makes knowing where the work is actually performed a substantive tax question rather than an operational detail.
- Buyers still examine Section 174 during tax diligence. Diligence teams look at how the target treated research expenditures during the capitalization years, whether transition rules were applied correctly, and whether foreign research costs remain subject to amortization. Clean documentation and consistent reporting shorten that process.
- Section 174 and the Section 41 research credit should be coordinated, not run separately. The two provisions serve different purposes but frequently reach the same underlying activities and expenses. Aligning the methodology for identifying qualified research expenditures across both improves compliance and holds up better under examination.
Five Questions Every Growth Company Should Still Be Asking Regarding Research Expenditures
When Congress enacted the One Big Beautiful Bill Act in July of last year, many technology companies breathed a collective sigh of relief. The legislation largely reversed one of the most unpopular business tax changes in recent memory by restoring the immediate deduction for domestic research and experimental expenditures through new Internal Revenue Code Section 174A. For many businesses, that meant an end to the unexpected tax bills created by the mandatory capitalization rules that took effect in 2022.
But while the headlines focused on the restoration of current deductions, the planning opportunities did not disappear. In many respects, they simply changed. Companies that assume Section 174 is no longer relevant may overlook important issues that continue to affect tax compliance, cash flow, and transaction readiness. Here are five questions every growth company should still be asking.
1. Have We Properly Addressed Our Previously Capitalized Domestic R&D Costs?
The new law restored immediate expensing for domestic research and experimental expenditures going forward, but it did not erase the history created under the prior rules. Many businesses continue to carry capitalized domestic research costs from tax years beginning after December 31, 2021. The legislation provides transition rules that allow taxpayers to recover those amounts under specified methods. Companies should ensure they have evaluated the available transition rules and implemented the approach that best aligns with their facts and tax profile.
2. Are We Still Performing Research Activities Outside the United States?
One of the most common misconceptions is that the new law eliminated all capitalization requirements. It did not. Although domestic research expenditures generally qualify for immediate deduction under Section 174A, foreign research expenditures remain subject to capitalization and amortization under Section 174. As more growth companies build international engineering teams or outsource software development overseas, the distinction between domestic and foreign research has become increasingly important. Businesses should understand where qualifying research activities are actually being performed and how that affects their federal income tax obligations.
3. Have We Identified All Expenditures That Qualify as Research and Experimental Costs?
The return of immediate expensing does not eliminate the need to properly identify Section 174 expenditures. Finance, engineering, and tax personnel should continue working together to determine which costs fall within the applicable rules. Accurate identification remains essential for proper tax reporting, particularly for businesses with both domestic and foreign development activities. Companies that rely on overly broad or inconsistent methodologies may still create unnecessary tax risk.
4. Are We Prepared to Answer Section 174 Questions During Tax Diligence?
The restoration of current deductions has not eliminated buyer interest in Section 174. In mergers and acquisitions, tax diligence teams continue to examine how target companies treated research expenditures during the capitalization years, whether transition rules were properly applied, and whether any continuing foreign research costs remain subject to amortization. Companies with well-documented analysis and consistent reporting are generally better positioned to respond to diligence requests and avoid unnecessary delays during a transaction.
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5. Have We Coordinated Our Section 174 Approach With Our Research Credit Strategy?
Many companies that incur significant research expenditures also claim the federal research credit under Section 41. Although these provisions serve different purposes, they often apply to many of the same underlying activities and expenses. Businesses should periodically review whether their processes for identifying qualified research expenditures are consistent across both provisions. A coordinated approach can improve compliance, reduce administrative burdens, and provide greater confidence if the company’s tax positions are ever examined.
The return of immediate deductions for domestic research expenditures was unquestionably welcome news for innovative businesses. Yet the law change should not be viewed as the end of the conversation. Companies that continue to monitor their historical capitalized costs, evaluate foreign research activities, maintain accurate documentation, prepare for transaction diligence, and coordinate their research credit strategy will be better positioned than those that assume the legislative changes eliminated the need for ongoing planning. The law may have changed, but thoughtful tax planning remains just as important as ever.
