The One Big Beautiful Bill Act (OBBBA) ushered in numerous changes to the tax code. One celebrated change occurred with respect to Section 174, which determines the tax treatment of research expenses. On its face, OBBBA once again allows for the immediate deduction of domestic research expenses through the introduction of a new Section 174A and provides mechanisms for transitioning from the five-year amortization schedule to the new immediate deduction treatment. The transition rules, however, can create scenarios that are detrimental for certain taxpayers, including traps for the unwary.

What is 174 and Why Does it Matter

Sections 174 and 174A govern how taxpayers treat research expenses on their tax returns. While 174 is closely related to the research and development tax credit, the definition of a 174 expense is broader, encompassing more activities than allowed for purposes of the tax credit rules. This can include expenses such as patent costs, software development costs, equipment costs, utilities charges, and legal fees, as well as wages, contractor expenses, and supply costs. Prior to the Tax Cuts and Jobs Act of 2017 (the Jobs Act), Section 174 allowed taxpayers to immediately deduct the expenses or capitalize and amortize them over five years. If immediately deducted, the treatment of the expense under Section 174 would look the same as a normal business expense under Section 162.

But the Jobs Act changed this, requiring taxpayers to amortize domestic research expenses over 5 years and foreign research expenses over 15 years, starting in 2022. This arguably created a disincentive for companies to conduct research, and in some instances, resulted in unexpected tax liabilities.

Section 174A once again allows taxpayers to immediately deduct domestic research expenses, with the option to amortize them over 5 years; foreign research expenses must still be amortized over 15 years. At the same time, the OBBBA created a transition plan that allows taxpayers to immediately deduct all remaining unamortized research expenses, deduct them over two years, or continue amortizing them over the remaining amortization schedule.

While these options offer planning opportunities, they can also yield unexpected results in other areas of the tax code.

Corporate Alternative Minimum Tax

The Corporate Alternative Minimum Tax (CAMT) creates a separate tax regime for large taxpayers (generally those corporations with financial statement income exceeding $1 billion) based primarily on adjusted financial statement income. Since CAMT is based on financial statement income, there can be significant differences in the treatment of expenses for financial reporting (or book) purposes and for tax reporting. The treatment of 174 expenses is one such example. Taxpayers who accelerate the unamortized 174 expenses under OBBBA may need to continue capitalizing them for book purposes, creating a discrepancy between CAMT taxable income and regular taxable income. This difference may trigger the CAMT, eliminating much of the tax advantage of the accelerated deduction. In this case, the amount paid against the CAMT in the current year will likely create a credit that can be applied in future years as the capitalized amount is deducted.

GILTI and NCTI

The OBBBA renamed the Global Intangible Low-Taxed Income (GILTI) to Net Controlled Foreign Corporations Tested Income (NCTI), where the “C” stands for the first “c” in CFC (controlled foreign corporations). The NCTI regime is intended to prevent U.S. taxpayers from shifting domestic profits to lower-taxed jurisdictions by creating a minimum tax on foreign income.

A company that has been amortizing 174 expenses for the last three years and is now in a position to accelerate the remaining amortization schedule into the current tax year may create an overall domestic loss (ODL). While the OBBBA removed the requirement to allocate research expenses to NCTI, an ODL created by the acceleration of research expenses may still limit the credit. Alternatively, in the event that the accelerated deduction reduces the overall taxable income below that of foreign-derived intangible income, the company may be limited to otherwise allowable deductions in the NCTI calculation. Unlike CAMT, this is not a temporary difference, as there is no mechanism for recovering the NCTI payment in the future.

Base Erosion and Anti-Abuse Tax

The Base Erosion and Anti-Abuse Tax (BEAT) is another minimum tax designed to prevent profit-shifting from the US to lower-taxed jurisdictions. The BEAT sets a minimum tax rate (10.5% under the OBBBA in 2026) on an adjusted taxable income for companies with average gross receipts exceeding $500 million that make otherwise deductible payments to related foreign parties. These payments can include cost-sharing research agreements or amortization deductions for such payments. Under BEAT, these payments are effectively disallowed, and the relevant taxable income becomes subject to the minimum tax rate.

The OBBBA changed BEAT, in part, to provide more favorable treatment of the research credit, allowing it to continue to reduce the taxable amount for BEAT purposes. But it did not offer similar favorable treatment for payments under a cost-sharing research agreement to related foreign corporations. As a result, taxpayers already subject to BEAT may increase their BEAT liability by accelerating deductions for research expenses.

State Conformity

Each state has its own priorities and policies, and this is prominently on display whenever states decide whether to conform to a significant change in the tax code. For the past several years, states have taken a stance on whether to adopt the amortization requirements under Section 174. Some states have decoupled from the federal statute and allow companies to continue deducting these expenses, creating a timing difference between federal and state returns.

Now, states are once again faced with this choice, and companies must pay attention not only to how 174 expenses are treated at the federal level but also at the state level. As one example, Pennsylvania recently decoupled from the changes to 174. Not only are companies unable to immediately deduct the remaining 174 expenses, but the amortization schedule also resets, requiring them to start a new five-year amortization schedule. And Pennsylvania is not alone; since the passage of the OBBBA, several states have addressed the changes either through legislation or administrative guidance.

Short Tax Years

The OBBBA was signed into law on July 4, 2025, but the changes to 174 became effective for tax years after December 31, 2024. While this provides most taxpayers with 6 months’ notice, for short tax years, it can be a retroactive change. If the taxpayer is subject to any of the tax situations described above, it may result in a deduction to regular tax, but an unexpected tax liability in other areas of the return.

If the short tax year is due to the acquisition or disposition of a business that closed between January 1, 2025, and July 4, 2025, the parties may not have had a chance to negotiate the result. The unamortized 174 expenses would be presented on the seller’s books as a deferred tax asset. But that asset could evaporate, allowing the seller to immediately deduct it on the final tax return before the transaction, leaving the buyer without the expected asset.

Bottom Line

The changes brought by the OBBBA to Section 174 (through enactment of Section 174A) are positive for taxpayers engaged in research activities, and the transition from required amortization to an optional immediate deduction provides them with tax-planning opportunities. The Treasury has been issuing guidance on the OBBBA since it first came out, and shows no sign of stopping. Future guidance may provide more relief in some of the situations described above, but that is not guaranteed.

Additionally, an adverse treatment in the short term, such as an increased CAMT liability, may be a temporary timing difference. The CAMT liability will create a credit that can be used to reduce future liabilities, but in other cases, such as GILTI and BEAT, those differences are permanent.

When considering the treatment of 174 expenses, particularly during this transition period, it is critical to understand the entire tax situation and stay up to date with the latest guidance. It is just as important, if not more so, to optimize the treatment and classification of expenses under Section 174. A 174 expense can have a very different impact on the tax return than a similar expense under 162.