OBBBA’s Treatment of Research Expenses: Pitfalls Taxpayers Should Avoid | Law Bulletins

Why Section 174 Is Poised to Shape Tax Strategy for Years to Come

When Congress passed the One Big Beautiful Bill Act (OBBBA), it didn’t just rewrite a single line of the tax code – it opened a new playbook for how companies treat research expenses. The creation of Section 174A restores the ability to take an immediate deduction for domestic R&D, but the transition rules have already produced unexpected ripple effects in federal tax administration, state conformity, and international tax regimes.

Key Trend #1 – The “Accelerate‑or‑Amortize” Decision Becomes a Strategic Lever

Businesses now face three paths for any unamortized 174 expense:

• Take a full immediate deduction.
• Spread the deduction over a two‑year “catch‑up” period.
• Continue the original five‑year amortization schedule.

Choosing the optimal path is no longer a purely accounting exercise; it directly influences the Corporate Alternative Minimum Tax (CAMT), the Net‑Controlled Foreign Corporations Tested Income (NCTI) calculation, and even state‑level tax timing differences.

Key Trend #2 – CAMT Credits May Turn Temporary Differences Into Long‑Term Savings

Companies that accelerate 174 expenses often see a spike in regular taxable income, but the same acceleration can inflate the CAMT base. The resulting CAMT liability creates a credit that carries forward, effectively turning a short‑term “penalty” into a future offset. Pro tip: Model both the regular tax and CAMT outcomes before filing – the credit can be worth 15‑20 % of the accelerated deduction in later years.

Key Trend #3 – NCTI (Formerly GILTI) May Lock In Permanent Deductions

Unlike CAMT, the NCTI regime does not allow a credit carry‑forward for an accelerated 174 deduction that creates an overall domestic loss (ODL). Companies with significant foreign‑derived intangible income must monitor the interplay between the accelerated deduction and the NCTI limitation, because a reduced taxable income can permanently shrink the NCTI credit pool.

Key Trend #4 – State Decoupling Is Accelerating

Several states, including Pennsylvania and Ohio, have already announced they will decouple from the federal five‑year amortization rule. The result: a timing mismatch where a company’s federal return shows a full deduction while its state return continues to amortize. This creates a temporary state‑level “tax windfall” that can be used for cash‑flow planning or reinvested in further R&D.

Key Trend #5 – Short Tax Years and Deal Structuring

For acquisitions that close in the first half of 2025, the OBBBA’s effective date (after 12/31/2024) can retroactively change the buyer’s and seller’s deferred tax asset calculations. In practice, sellers may “flip” a large deferred tax asset into an immediate deduction, leaving the buyer without the expected tax shield. Deal teams now routinely include a Section 174 adjustment clause in purchase agreements.

Real‑World Example: A Mid‑Size Biotech Firm

Acme Biologics spent $12 million on domestic R&D in 2023. Under the Jobs Act, those expenses would have been amortized at $2.4 million per year through 2027. After OBBBA, Acme elected the immediate‑deduction route in 2025, reducing its regular tax liability by $2.5 million. However, the same move pushed its CAMT base up by $3 million, resulting in a $450,000 CAMT liability. The company recorded a $450,000 CAMT credit that will offset taxes in 2027 and 2028, effectively smoothing the impact over a three‑year horizon.

Future Outlook: What to Watch in 2026‑2028

• IRS Guidance Refresh: Expect new Treasury FAQs that clarify how the “catch‑up” two‑year amortization interacts with NCTI.
• State Legislation Wave: Emerging bills in the Mid‑West aim to permanently adopt the immediate deduction for state tax purposes.
• Technology‑Driven Planning: Advanced tax‑analytics platforms are integrating CAMM and NCTI simulations, making real‑time decision‑making a reality.

FAQ

Can I switch from amortization to an immediate deduction after I’ve started the five‑year schedule?

Yes. Section 174A allows a one‑time election to accelerate any remaining unamortized balance in the year you make the election.

Will the accelerated deduction affect my state tax return?

It depends on whether your state has decoupled. In conforming states the treatment mirrors the federal election; in non‑conforming states you’ll continue to amortize.

How does the CAMT credit work?

The credit is generated when your CAMT liability exceeds your regular tax. It can be carried forward indefinitely to offset future CAMT liabilities.

Is there any benefit to keeping the five‑year amortization?

Maintaining amortization can smooth taxable income and avoid triggering CAMT or NCTI limitations, which might be advantageous for companies with tight cash‑flow constraints.

Do foreign‑derived R&D expenses ever qualify for immediate deduction?

Under OBBBA, foreign research must still be amortized over 15 years; no immediate deduction is available.

What’s Your Strategy?

Whether you’re a startup chasing the next breakthrough or a multinational balancing U.S. and foreign tax regimes, the choices you make today will echo through your CAMT, NCTI, and state tax positions for years to come.