This bill restores the immediate deduction of research and experimental expenditures, allowing businesses to deduct these expenses in the year they are incurred, effective for taxable years after 2021.
Ron Estes
Representative
KS-4
The American Innovation and R&D Competitiveness Act of 2025 modifies the tax treatment of research and experimental expenditures, allowing taxpayers to deduct these expenses in the year they are incurred rather than capitalizing them. This change applies to expenses related to the taxpayer's business and is effective for taxable years beginning after December 31, 2021. The act also includes provisions for electing to treat these expenditures as deferred expenses and updates related sections of the tax code.
Tax Bill Reverses R&D Rule, Allows Immediate Expense Deduction Retroactive to 2022
Congress is looking at a significant shift in how businesses handle taxes for research and development (R&D). The American Innovation and R&D Competitiveness Act of 2025 proposes changes to Section 174 of the tax code, essentially rolling back a recent rule. If passed, this bill would allow companies to deduct their qualified R&D expenses in the year they happen, rather than having to spread those costs out (amortize) over five years or more. Critically, this change would apply retroactively to tax years starting after December 31, 2021.
Back to Immediate Write-Offs
So, what's the big deal? Until recently, companies could immediately write off R&D costs, which helps cash flow – think less tax owed now, freeing up money for more research, hiring, or other investments. A change implemented for tax years starting in 2022 required companies to capitalize these costs and deduct them slowly over several years. This bill hits the undo button on that requirement. For businesses involved in developing new products, software, or processes, this means potentially simpler tax accounting and a quicker tax benefit. The retroactive part means companies might be able to amend past tax returns (from 2022 onward) to claim these immediate deductions, potentially leading to refunds, though it could also mean some complicated paperwork.
The Nitty-Gritty: Options and Oversight
It's not just about immediate deductions, though. The bill gives businesses a choice: deduct immediately or elect to treat the costs as deferred expenses, writing them off evenly over at least 60 months (5 years). Once a method is chosen, companies generally need to stick with it unless they get IRS approval to change. However, there are guardrails. This rule doesn't apply to costs for buying land or buildings, or for property that can be depreciated anyway. More importantly, the bill specifies that only reasonable research expenditures qualify. What counts as 'reasonable'? The bill doesn't define it, which could open the door to disagreements between businesses and the IRS down the line. This means companies need to be careful about documenting exactly what costs they're claiming as R&D.