President Trump and company’s ‘One Big Beautiful Bill’ (‘OBBB’ for this article’s purposes) is still in the works, with the initial version having passed through the House of Representatives, and subsequent revisions being proposed by the Senate awaiting approval. The bill is the most extensive proposed in U.S. history, and thus affects a multitude of tax areas in both the individual and corporate realm. On the corporate side, the proposals significantly impact the treatment of research and development costs, bonus depreciation, and other related matters. Since tax year 2022, per the Tax Cuts and Jobs Act (TCJA), companies have been required to capitalize U.S. based research and development costs and amortize them over a 5-year period using a mid-year convention.
Possible Revisions to R&D Cost Accounting
Potential changes of R&D Cost treatment are as follows. The initial version of the OBBB passed through the House of Representatives. proposed that the TCJA’s requirement to capitalize research costs be rescinded, starting in tax year 2025. It did not contain any retroactive changes or impact on tax years 2022 – 2024, where research costs had to be capitalized. This would effectively bring research and development costs treatment back to pre-2022 treatment, where companies could deduct R&D expenses and continue to claim the R&D Credit, as the PATH Act intended (i.e., providing innovative companies an immediate, tax-savings benefit). Companies can continue to capitalize and amortize R&D costs if they so choose.
The Senate Finance Committee has since added significant updates to the initial proposal. Mainly, it proposes that companies with average gross receipts under $31M per year will be permitted to apply immediate deductions of R&D costs retroactively to tax years 2022 – 2024, where they were priorly capitalized. Alternatively, a company could choose to accelerate the remaining amortization of capitalized R&D costs in tax year 2025, rather than amending prior year returns.
Key takeaways for R&D Cost Treatment: Both versions ultimately allow for immediate deduction of research costs in tax years 2025 and onward. The initial version of the OBBB does not affect tax years prior to 2025; the subsequent, Senate-proposed version allows for retroactive immediate deductions of R&D costs or accelerated amortization in 2025. The last, albeit least likely, alternative is that no versions the OBBB ultimately pass; in that case, companies will continue to be required to capitalize research costs, while the R&D Credit to offset tax in the immediate remains available. Under either version of the Bill, foreign-based research and development costs still must be capitalized and amortized over a 15-year period.
Potential Impact on Cost Segregation – The Return of 100% Bonus Depreciation
The pending One Big Beautiful Bill proposes a significant change to depreciation rules by reinstating 100% bonus depreciation for qualifying property placed in service on or after January 19, 2025. The most current Senate version of the bill aims to make this permanent without a phase down.
If passed, this legislation would dramatically increase the value of cost segregation studies, especially for real estate investors acquiring or renovating property in 2025 and beyond. Under current law, bonus depreciation is phasing down annually, dropping to 40% in 2025, which limits the front-loaded tax benefit of accelerated depreciation. The return of 100% bonus would restore the ability to deduct up to 20 to 30 percent on average of a building’s basis in the first year.
This change would also make cost segregation more lucrative for lower-basis properties, especially those under $1 million. These properties may not have justified a study under previous reduced bonus rates.
Additionally, a return to 100% bonus depreciation could reignite real estate investment activity. Even in the current high-interest real estate environment, the ability to generate significant first-year tax deductions may be enough to push investors off the sidelines and back into acquisition mode, driven by the tax advantages alone.
