R&E Expenditures: A Shifting Landscape in Federal and State Tax Policy
The treatment of research and experimentation (R&E) expenditures has undergone a dramatic transformation in recent years, and the latest federal legislation—the One Big Beautiful Bill Act (OBBBA)—adds yet another layer of complexity. For businesses engaged in innovation, understanding these changes is critical not only for federal tax planning but also for navigating an increasingly fragmented state tax environment.
From Expensing to Amortization—and Back Again
Before the Tax Cuts and Jobs Act (TCJA) of 2017, businesses could immediately expense R&E costs under IRC Section 174, regardless of whether the research was conducted domestically or abroad. TCJA changed that, requiring:
- 5-year amortization for domestic R&E expenses
- 15-year amortization for foreign R&E expenses
These changes were deferred until tax year 2022.
Enter the OBBBA: it reinstates full expensing for domestic R&E starting in 2025, while retaining the 15-year amortization for foreign R&E. To implement this, Congress introduced Section 174A, which governs R&E treatment from 2025 onward. Meanwhile, the original Section 174 remains applicable only through 2024.
State Conformity: A Patchwork of Policies
States are far from unified in their response:
- Rolling conformity states (e.g., Illinois, New York): Generally adopt Section 174A.
- Static conformity states (e.g., Florida, North Carolina): Still follow Section 174 as applied from 2022–2024.
- Pre-TCJA conformers (e.g., California): Maintain immediate expensing rules.
- Elective conformity states: Allow taxpayers to choose which version of Section 174 to apply.
This divergence creates a compliance maze for multistate businesses, especially those with significant R&E investments.
What’s Next?
Peritz Consulting suggests that more states may decouple entirely from federal R&E rules to offer consistent, taxpayer-friendly treatment—potentially for both domestic and foreign expenditures. However, some states may resist full expensing due to revenue concerns and revert to the TCJA-era amortization rules.