New Federal Research Tax Credit Rules: How Increasing Research Activity Can Benefit Innovators From the One Big Beautiful Bill Act

A major shift in federal tax law now allows innovative businesses to deduct many domestic research and experimental costs immediately.  The One Big Beautiful Bill Act of 2025 (the “OBBB”) created new Internal Revenue Code (“IRC”) §174A, permitting full first‑year expensing of domestic “research and experimental” costs for tax years beginning after Dec. 31, 2024.

Alternatively, taxpayers may elect to amortize those domestic “research and experimental” costs over a period of not less than 60 months. This reverses the prior rule under the Tax Cuts and Jobs Act that required capitalization and five‑year amortization for domestic “research and experimental” costs for taxable years beginning after Dec. 31, 2021.

Foreign “research and experimental” costs remain subject to capitalization and 15‑year amortization. Together with the long‑standing federal Research Credit under IRC §41 (the “R&D Tax Credit”), these changes improve after‑tax cash flow for businesses investing in innovation.

Overview of the R&D Tax Credit

The R&D Tax Credit is a reduction of federal income tax based on “qualified research expenses” (QREs). QREs generally include:

• Wages for employees performing, directly supervising, or directly supporting qualified research;
• Supplies (non‑depreciable tangible property) used in qualified research;
• Computer rental or cloud‑computing costs used directly in qualified research;
• Certain contract research (typically 65 percent of amounts paid to third parties, with special rules for universities/consortia).

What Changed: §174A Domestic “Research and Experimental” Expensing (Post‑OBBB)

For tax years beginning after December 31, 2024, taxpayers may deduct domestic “research and experimental” expenditures under §174A in the year paid or incurred, or elect to capitalize and amortize them over 60 months beginning with the month benefits are first realized. Transition rules allow recovery of certain unamortized amounts from tax years beginning after 2021 and before 2025.

IRS Scrutiny: Documenting Technological Uncertainty

The IRS is being more stringent as to what qualifies for the credit, making careful documentation a high priority. To claim the credit, activities must satisfy the four‑part test under IRC §41: (1) permitted purpose, (2) technological in nature, (3) elimination of uncertainty, and (4) a process of experimentation. Documentation tying people, time, costs, iterations, and results to business components is essential. The IRS has updated Form 6765 and its instructions: new Section G (Business Component Information) is for tax years beginning before 2026 and becomes required for tax years beginning after 2025.

R&D Tax Credit Is for Individual & Business Innovators

The credit is available to taxpayers carrying on a trade or business, including corporations, partnerships, S corporations, and sole proprietors. Qualified startups may elect to apply up to $500,000 of the R&D credit against employer payroll taxes—first up to $250,000 against the employer Social Security tax, and then any remaining amount against the employer Medicare tax.

Legal fees for acquired trademarks do not qualify for the R&D Tax Credit based on the distinction that they are considered costs to protect another type of intellectual property rather than expenses for the technical development of a new product or process. They are generally treated as intangibles that are amortized over 15 years unless characterized as a self-created trademark cost which comes under a “useful life” analysis for capitalization and amortization.

Intellectual Property Cost Distinctions to Track

• Patent Prosecution: Legal costs are generally IRC §174 costs but are not “qualified research expenses” for the IRC §41 credit.
• Trademarks: Legal & registration costs are not QREs. If a trademark is acquired, it is generally an IRC §197 intangible amortized over 15 years. Self‑created trademark & registration costs are generally capitalized and amortized over their useful life.
• Acquired patents and other acquired intangibles are typically IRC §197 intangibles amortized ratably over 15 years.

Section §174A and the R&D Tax Credit: Incentive for Innovation

For businesses with current or future plans to invest in innovation, the R&D credit together with domestic expensing under IRC §174A is a valuable, coordinated incentive.

What you can do now:

• Certain small businesses may amend 2022-2024 retroactively to apply the IRC §174A retroactively.
• Model 2025 treatment of domestic research and experimental expenditures. Compare immediate expensing under IRC §174A to elective 60-month amortization.  
• Align IP and tax accounting: segregate patent prosecution costs from trademark costs and coordinate the R& D credit. Distinguish “qualified research expenses” – wages, supplies, cloud & computer rental) from “non-qualified research expenses” (patent prosecution) and from “acquired intangibles” (acquired trademarks).
• Tighten substantiation: Map projects to business components, link technical uncertainties to a process of experimentation, and prepare for Form 6765 Section G disclosures starting with tax years beginning after 2025.