8158 / How does tax reform modify the treatment of research, development and experimental expenditures?

The research and development credit under IRC Section 41 was retained by the 2017 tax reform legislation. However, with respect to amounts paid or incurred in tax years beginning after December 31, 2021, certain research and experimental expenses were required to be capitalized or amortized over a five-year period (15 years if the research is conducted outside of the U.S.).¹ This provision specifically applies to software development expenditures.²

The 2025 OBBB has changed this rule with respect to domestic R & D expenditures.  For domestic research and development expenses incurred in tax years beginning after December 31, 2024, taxpayers may now elect to (1) immediately deduct R&D costs in the year incurred, or (2) capitalize and amortize costs over the useful life of the research (but not less than 60 months).³  The 15-year requirement continues to apply if the research is conducted in a foreign country.

Land acquisition costs, mining costs (including oil and gas exploration) are not subject to the five-year requirement.⁴

Once the property is abandoned, retired or otherwise disposed of, the remaining basis in the property must continue to be amortized over the remaining time period.⁵

The credit for clinical testing expenses was limited to 25 percent (reduced from 50 percent) of qualified clinical testing expenses for the year. Taxpayers are also entitled to elect a reduced credit instead of a reduction in other allowable deductions for the year.⁶