New Tax Rule Gives Businesses a Choice: Deduct R&D Costs Now or Spread Them Over 5 Years, Effective Since 2022

The "American Innovation and R&D Competitiveness Act of 2025" is taking a swing at how businesses write off their research and development (R&D) costs. This bill focuses entirely on rewriting Section 174 of the tax code, which is the rulebook for what companies can deduct when they spend money trying to invent new things or improve old ones. The big change is that it formalizes two options for businesses: they can either take the full deduction for R&E costs right away in the year they spend the money, or they can choose to spread that deduction out evenly over a minimum of five years (60 months). This choice, once made, is generally locked in, meaning you need the Treasury Secretary’s permission to switch later.

The Real-World Cost of Tax Paperwork

For the busy people running businesses, this is a major change in cash flow management. Imagine a software startup that spends $500,000 developing a new app. Under the immediate deduction option, they cut their taxable income by that full half-million dollars right away. That’s crucial working capital. If they choose the amortization route, or if they’re forced into it, they only deduct $100,000 this year, pushing the rest of the tax benefit into the future. While flexibility is good, the fact that this applies retroactively to tax years starting after December 31, 2021, means companies have to redo their books for the past few years, which is a massive headache and compliance cost.

Where the IRS Gets to Say 'No'

This bill introduces a couple of key restrictions. First, the R&E rules don't apply to costs for buying land or property that can be depreciated, like a new factory building (though the allowances for that property can be counted as R&E). Second, and perhaps more importantly, the law only applies if the R&E spending is considered “reasonable.” This word—"reasonable"—is where things get vague. It essentially gives the IRS significant discretion to challenge and potentially deny deductions if they decide the amount spent wasn't justified. For a growing biotech firm, knowing that a massive investment could be later deemed "unreasonable" introduces serious financial risk and uncertainty.

The Credit vs. Deduction Tightrope

Finally, the bill addresses an important technicality regarding the Research Tax Credit. Many companies claim this credit to encourage innovation. This bill updates Section 280C(c) to make sure you can’t double-dip: if you claim the research credit, you cannot also take the full immediate deduction for those same expenses. You have to reduce either the deduction or the credit amount. For the company accountant, this means even more complex calculations to figure out the optimal tax strategy, balancing the immediate benefit of a deduction against the long-term benefit of the credit. While this prevents gaming the system, it adds another layer of complexity to an already dense tax code, making compliance harder for small businesses that don't have dedicated tax departments.