On May 12, 2025, the House Ways and Means (W&M) Committee released its draft tax legislative proposals. Since tax years beginning after December 31, 2021, taxpayers have been required under internal revenue code (IRC) Section 174, to capitalize specified research and experimental expenditures (SREs) and amortize them over either five (domestic research) or 15 (foreign research) years.
Domestic R&D Capitalization Temporarily Suspended Until 2030
Under the proposed language of the W&M Committee, for tax years beginning after December 31, 2024, and before January 1, 2030, taxpayers would be provided with the flexibility to choose one of the three below-listed options related to SRE expenditure deductibility, similar to the pre-Tax Cuts & Jobs Act (TCJA) regime:
- They could currently deduct their current year domestic SREs;
- They could elect to capitalize domestic SREs over a minimum period of 60 months or the useful life of the research; or
- They could elect to capitalize their domestic SREs for a ten-year period beginning with the year in which the expenditure in incurred (See IRC Section 59(e)).
The elections under options two and three above must be made on a timely-filed tax return. Such flexibility would not be allowed; however, for foreign SREs, which would continue to be capitalized and amortized over a 15-year period beginning with the midpoint of the taxable year in which the foreign SREs are paid or incurred.
SRE expenditures generally include all costs incurred in the experimental or laboratory sense incident to developing or improving a product, including software (See IRC Section 174(c)(3) and Treas. Reg. Section 1.172-2(a)(1)). These include labor costs, materials and supplies costs, depreciation or amortization for property used in SRE activities, patent costs, travel costs related to SRE activities, and some amount of operation and management costs (i.e., overhead).
Since 2022, research and development (R&D) capitalization has caused the taxable income of many U.S. taxpayers to increase. Taxpayers performing research on behalf of another that retain substantial rights in the research or bear economic risk while performing the research (e.g., under a fixed fee contract) have felt penalized under the mandatory capitalization regime because they have been required to capitalize their SREs even when they were reimbursed by a third party.
For purposes of IRC Section 41, IRC Section 280C would again apply (for tax years beginning after December 31, 2024, and before January 1, 2030). Accordingly, such taxpayers would be required to reduce their SREs by the amount of gross R&D credit or elect a reduced research credit on a timely-filed tax return.
While taxpayers would be able to fully expense domestic capitalized SREs upon the disposition of the trade or business to which they relate, no such favorable treatment would exist for foreign capitalized SREs. Transition rules would require taxpayers to adopt the changes to the treatment of domestic SREs for tax years beginning after December 31, 2024, and for tax years beginning after December 31, 2029, as automatic accounting method changes on a cutoff basis.
Your Guide Forward
While these proposals should provide relief for taxpayers who have been harmed by TCJA’s mandatory capitalization regime, they are not retroactive, and they are temporary. As such, prior-year SRE expenditures would still be governed by prior-year-calculated amortization schedules. The ability to recover domestic SREs upon the disposition of a trade or business, however, would provide businesses additional flexibility.
Regardless of whether the proposed changes become law, taxpayers will still be subject to enhanced documentation requirements for the 2025 tax year. Accordingly, meeting with a Cherry Bekaert tax professional would be recommended (see IRS Updates Form 6765 for 2025 R&D Tax Credits).
Cherry Bekaert's R&D Tax Credits team is ready to help you navigate these updates. Our tax advisors can help maintain compliance with the new standards and optimize your research credit claims. Reach out to Cherry Bekaert today to partner with a trusted advisor who can guide you through these changes, allowing you to focus on innovation and growth.
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