Part 2: Managing Compliance and Accounting with the OBBBA’s R&D Expensing Changes

Introduction

Restoring immediate expensing for domestic R&D is great news, but it also means navigating new compliance waters. Shifting from amortization back to expensing triggers accounting method changes, catch-up deductions, and revised rules on classifying expenses for the Research Credit. Businesses that rely on offshore R&D also face continuing rules to amortize foreign expenses. Although we anticipate IRS guidance to clarify some outstanding questions, we can already begin to gauge how to approach compliance under the OBBBA.

Accounting Method Changes: What You Need to Do

Switching from amortizing R&D costs to immediately expensing them counts as a change in accounting method. Luckily, the OBBBA streamlines this by automatically granting IRS consent, so you avoid the usual lengthy pre-approval process. Still, you must file IRS Form 3115 (Application for Change in Accounting Method) alongside your tax return for the year you make the switch (usually 2025).

Important Note: the window to catch up with 2022–2024 amortized expenses closes July 4, 2026, so it’s important to act within this timeframe to secure the full benefit.

Catch-Up Deduction: Making Up for Past Amortization

If you amortized domestic R&D costs in 2022-2024, you don’t need to wait years to write off the remaining balance. The OBBBA lets you “catch up” by deducting the unamortized amounts in 2025, either all at once or split over two years.

This recapture is treated as an automatic change in accounting method. Therefore, taxpayers do not need advance IRS approval but must file Form 3115 with their 2025 return to formally report the change from amortization to immediate expensing.

Because the change is made on a cutoff basis, it only applies to income and deductions from 2025 onward. Prior years’ amounts remain unchanged, so there’s no need to adjust past income. Normally, when changing accounting methods, taxpayers must make a Section 481(a) adjustment to reconcile differences between old and new methods and avoid double-counting or missed income. With a cutoff basis change, this adjustment isn’t required.

Expense Classification and R&D Credits

The TCJA preserved a “may” clause in Section 41 that allowed taxpayers to choose whether to treat certain qualifying R&E costs as expenses under Section 174 or as part of COGS, provided this treatment was consistent. Because of this, many taxpayers historically claimed research credits on R&D costs reported as COGS.

The OBBBA replaces this discretion with a requirement that qualifying expenditures “are treated” as Section 174 costs starting with tax years after December 31, 2024. Starting in 2025, qualifying R&D expenses must be recorded under Section 174 to count for the Research Credit. 

For years before 2025, the retention of the “may” clause confirms that prior accounting methods—such as classifying R&E expenses in COGS—are valid if consistently applied. However, taxpayers adjusting their accounting for future years, such as reclassifying R&E costs from COGS to Section 174, must follow the appropriate accounting method change procedures, including filing Form 3115.

Foreign R&D Costs—Still Amortize Over 15 Years

Unlike domestic expenses, foreign R&D costs continue to require a 15-year amortization. Historically, some companies classified foreign R&D costs in COGS—especially when performing research under contract or subcontracting abroad. Starting in 2025, all foreign R&D expenses, whether performed internally or under contract, must be capitalized and amortized under Section 174A. This affects several types of companies, such as many software firms and engineer-to-order manufacturers.

Software Development & Foreign R&D

Many software companies rely on foreign subcontractors for development work. Because these costs must be amortized over 15 years, outsourcing may be more expensive and impact profitability.

It’s important to note that not all foreign programming activities rise to the level of R&E. Routine tasks such as quality assurance (QA) testing or software maintenance—like updating code to a new version without adding new functionality—do not meet the R&E standard and therefore are not subject to Section 174A amortization. Routine tasks such as quality assurance (QA) testing or software maintenance—like updating code to a new version without adding new functionality—do not meet the R&E standard and therefore are not subject to Section 174A amortization.

Engineer-to-Order (ETO) Companies & Foreign R&D

Many specialized engineering companies that design bespoke products for their customers often subcontract work overseas. Many times, the U.S. company engineers the solution and farms out the fabrication to a foreign “build-to-print” company. If these fabrication activities do not involve engineering design or experimentation, then they generally do not rise to the level of R&E. Such

manufacturing or built-to-print work may continue to be treated as regular business expenses, including COGS, rather than capitalized R&D costs.

Conclusion

The U.S. has always been a global leader in innovation, but the mandatory amortization of R&D expenses over the last five years has set us back. The OBBBA is a big step forward in supporting U.S. innovation by restoring immediate R&D expensing, but it carries technical compliance steps businesses must understand. Effective filing of accounting method changes, expense reclassifications, foreign R&D treatment, and careful documentation will ensure taxpayers get the maximum tax advantage while staying on the right side of the IRS.

Author Information

Jenna Tugaoen is a tax attorney at Sycamore Growth Group, an Ohio-based tax advisory firm specializing in assisting businesses to attain and substantiate public economic incentives such as R&D and energy credits.

Rick Kleban is the founder and president of Sycamore Growth Group, an Ohio-based firm specializing in securing economic incentives that maximize cash flow and minimize risk.

James Bean, CPA, is a senior researcher and R&D tax controversy specialist at Sycamore Growth Group.

Anri Sorel is a JD Candidate at The Ohio State University Moritz College of Law and, prior to law school, obtained an economics degree from Georgia Institute of Technology.