Senate amends tax bill to permanently restore R&D expensing and allow amendments for prior years

Senate Pushes to Reinstate Immediate R&D Deductions for U.S. Firms

A new legislative proposal from the Senate Finance Committee could dramatically alter how American companies handle their research and development (R&D) expenses for tax purposes. The proposed measure seeks to undo a controversial element of the 2017 Tax Cuts and Jobs Act (TCJA), which began requiring companies in 2022 to spread out the cost of R&D over multiple years rather than deducting it all at once.

Return to Upfront Write-Offs for Domestic Research

Since 2022, businesses have been compelled to amortize domestic R&D costs over a five-year span, while foreign R&D spending must be spread over 15 years. This shift has put a strain on businesses, particularly those with high innovation expenditures. The new Senate bill would bring back the option to fully deduct domestic R&D costs in the year they are incurred, starting with tax years that begin after December 31, 2024. These changes would be codified under a newly proposed tax code provision, Section 174A, focusing exclusively on research conducted within the United States.

No Change for Overseas R&D Costs

However, the proposed reform would not modify how companies handle R&D activities conducted abroad. Those expenses would still need to be amortized over a 15-year period, maintaining a disparity between domestic and international tax treatment of research spending.

Amortization Election Available

Though the default would shift back to immediate expensing for U.S.-based R&D, companies could choose to amortize these costs instead—over at least 60 months, beginning when the resulting benefits are first realized. This choice must be formally made by the tax filing deadline, including extensions, for the year in which the costs were incurred.

Special Relief for Smaller Enterprises

Small businesses stand to gain significant retroactive benefits under the proposal. Enterprises with annual gross receipts under $31 million, as defined by Section 448(c), could apply the full deduction rules retroactively to tax years starting in 2022. To take advantage, eligible companies would need to elect into the new rules within a year of the bill’s passage and amend previously filed returns—potentially recouping taxes already paid on amortized R&D expenses.

For other businesses with qualifying domestic R&D expenses between the start of 2022 and the end of 2024, the bill offers flexibility: they could either deduct the remaining unamortized balance in full in 2025 or spread it evenly over two years.

Streamlined Accounting Adjustments

Companies opting into these changes would be treated as having switched accounting methods. This switch would be deemed automatically approved by the IRS, eliminating the need for a formal application or risk of penalties for prior filings. The bill also outlines technical guidelines to ensure alignment with existing tax provisions like the R&D tax credit (Section 41), disallowance rules (Section 280C(c)), and accounting method regulations (Section 481), with the goal of minimizing compliance burdens during the transition.