Can I immediately expense my domestic R&E in 2025?
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Yes, for tax years beginning after December 31, 2024—including 2025—you may immediately expense your domestic research and experimental (R&E) expenditures under new Section 174A.
Legal Framework
1. Section 174A: Immediate Expensing for Domestic R&E
- Section 174A(a) provides that, notwithstanding Section 263, a taxpayer may deduct domestic R&E expenditures paid or incurred during the taxable year. This means you can fully deduct these costs in the year they are incurred, rather than being required to capitalize and amortize them over multiple years.
- Section 174A(b) defines "domestic research or experimental expenditures" as those paid or incurred in connection with the taxpayer’s trade or business, other than expenditures attributable to foreign research (as defined in Section 41(d)(4)(F)).
2. Effective Date
- The amendments creating Section 174A apply to amounts paid or incurred in taxable years beginning after December 31, 2024.
- For calendar-year taxpayers, this means the rule is effective for the 2025 tax year.
3. Optional Amortization
- Taxpayers may elect to capitalize and amortize domestic R&E expenditures over a period of at least 60 months, starting with the month in which the taxpayer first realizes benefits from the expenditures. This election must be made by the due date (including extensions) of the return for the year in which the expenditures are paid or incurred, and the method must be applied consistently unless changed with IRS approval.
4. Exclusions and Special Rules
- Expenditures for acquiring or improving land, or for acquiring or improving depreciable or depletable property, are not eligible for immediate expensing under Section 174A; these are subject to other capitalization rules.
- Expenditures for exploration for minerals, oil, or gas are also excluded.
- Software development costs are specifically included as eligible R&E expenditures for immediate expensing.
5. Foreign R&E Expenditures
- Section 174, as amended, now applies only to foreign R&E expenditures, which must be capitalized and amortized over 15 years, starting at the midpoint of the year incurred. Immediate expensing is not available for foreign R&E.
6. Transition and Method Change
- The change to immediate expensing is treated as a change in method of accounting under Section 481, initiated by the taxpayer and made with the consent of the Secretary, but applied on a cut-off basis for expenditures paid or incurred in taxable years beginning after December 31, 2024.
Summary: You may immediately expense all domestic R&E expenditures paid or incurred in 2025, unless you elect to capitalize and amortize them. This is a significant change from prior law, which required capitalization and amortization over five years for domestic R&E. The new rule does not apply to foreign R&E, which must still be amortized over 15 years.
If you have previously capitalized domestic R&E expenditures from 2022–2024, you may also elect to deduct the remaining unamortized balance in 2025 or over two years starting in 2025.
In summary: For 2025, you can immediately expense your domestic R&E expenditures under Section 174A.
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