Alert
The State of IRC Section 174 R&E in the Tax and Spending Bill
The U.S. House of Representatives narrowly passed a comprehensive reconciliation bill, H.R 1—called the One Big Beautiful Bill Act—that includes significant proposed tax changes and spending cuts, on May 22, 2025, with a vote of 215-214. This sweeping proposed legislation, which encompasses a variety of tax reforms, includes significant changes to how taxpayers treat research and experimental (R&E) expenditures under Internal Revenue Code (IRC) Section 174. As the bill moves to the Senate, intense negotiations and potential modifications are expected, and we will monitor the fate of R&E tax deductions.
With competing interests and varying priorities among lawmakers, the resolution will depend on the ability of both chambers to negotiate effectively and find common ground. Senate leadership aims to have H.R. 1 on the President’s desk by July 4, 2025, so the coming weeks will be critical in determining whether the proposed changes to IRC Section 174 will be expanded or modified.
Understanding IRC Section 174
Under current law, taxpayers are required to capitalize and amortize R&E expenditures over a five-year period for domestic R&E expenditures and a 15-year period for foreign R&E expenditures. This policy has drawn criticism from various industries, particularly those in technology and manufacturing, who argue that R&E amortization stifles investment in research and development.
Proposed Changes in the Bill
The bill proposes reinstating immediate expensing for domestic R&E expenditures. If enacted, the legislation would suspend the current requirement to capitalize and amortize domestic R&E expenditures for taxable years beginning after December 31, 2024, and before January 1, 2030.
The bill introduces a new IRC Section 174A, allowing taxpayers to deduct domestic R&E expenditures in the year incurred or elect to amortize them over a minimum of 60 months. However, the bill maintains the existing 15-year amortization requirement for foreign R&E expenditures, reflecting a policy choice to focus incentives on domestic research and experimentation.
Senate Negotiations: What to Expect
The bill, now with the Senate, is anticipated to receive significant modifications. Senate Finance Chairman Mike Crapo has indicated a desire to make permanent certain business tax cuts, including the proposed IRC Section 174 R&E deductions, rather than allowing them to expire after 2029, as currently drafted. This potential change, however, may face resistance from deficit hawks within both the House and Senate, who are wary of the long-term fiscal implications.
Meanwhile, Senators Maggie Hassan and Todd Young may push S. 1639, the American Innovation and Jobs Act, which they introduced in May to permanently restore full expensing for both domestic and foreign R&E expenditures and expand the Section 41 R&D credit.
The path to reconciling the House and Senate versions of the bill is fraught with challenges. The narrow margin by which the House passed the bill raises questions about the feasibility of achieving consensus in the Senate.
If the senators can’t get their proposed changes into the bill, how each item is prioritized will be critical. For example, will Crapo’s objectives hold more weight as the Senate Finance Committee Chairman or will other GOP senators hold out for modifying the House’s aggressive phaseout of clean energy tax credits. How each of these items are negotiated behind closed doors could impact how IRC Section 174 may change in the Senate bill, if at all. It is also entirely possible the proposed IRC Section 174 provisions in the bill will be left untouched.
It wasn’t long ago that the U.S. House of Representatives passed a tax bill, including modifications to IRC Section 174, that ultimately failed in the Senate. That is possible again but given President Trump’s influence in the GOP led Congress, it seems unlikely that nothing will happen.
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