On June 16, 2025, the Senate Finance Committee released its draft of the tax provisions in H.R. 1 (commonly referred to as the “One Big Beautiful Bill” (the SFC Bill)). We previously covered the original legislation passed by the U.S. House of Representatives on May 22, 2025 (the House Bill), and the proposed expansion of the “qualified small business stock” tax exemption in the SFC Bill.
A significant change in the SFC Bill compared to the House Bill is that the SFC Bill permanently eliminates, rather than suspends, capitalization of domestic R&D expenses under Section 1741 beginning January 1, 2025, and allows certain small businesses to retroactively deduct domestic R&D expenses. In addition, the SFC Bill allows taxpayers to accelerate deduction of domestic R&D expenses incurred between January 1, 2022, and December 31, 2024. These changes, if enacted, will materially benefit life science, biotech, and other research-intensive emerging growth companies, freeing up much needed capital for investment in R&D.
Permanent Expensing of Domestic R&D Costs
P.L. 115-97, more commonly known as the “Tax Cuts and Jobs Act” (TCJA), required taxpayers to capitalize certain R&D expenses for amounts paid or incurred in tax years beginning on or after January 1, 2022. Domestic expenses must be amortized over five years, and foreign expenses must be amortized over 15 years, beginning with the midpoint of the taxable year such costs are incurred. Biotech and other research-intensive companies were hit particularly hard by this provision, as many companies operating at a significant loss for book and operational purposes found themselves in an income tax position unexpectedly.
The House Bill allows taxpayers to deduct (rather than capitalize) domestic R&D expenses paid or incurred in tax years beginning on or after January 1, 2025, and before January 1, 2030. The Senate Bill extends this provision by permanently allowing immediate deduction of domestic R&D expenses paid or incurred in tax years beginning on or after January 1, 2025. The SFC Bill follows the House Bill in permitting a taxpayer to elect to capitalize domestic R&D expenses and amortize them over a period of five or more years.
Retroactive Expensing for Certain Small Businesses
Unlike the House Bill, the SFC Bill permits eligible small businesses to elect to retroactively expense domestic R&D costs paid or incurred beginning in taxable years starting on or after January 1, 2022, effectively eliminating the TCJA changes to Section 174 for such businesses, at least with respect to domestic R&D expenses. Small businesses are defined by reference to cash method accounting and include any corporation or partnership whose average annual gross receipts for the three taxable years ending with the taxable year beginning before January 1, 2025 (e.g., 2022-2024 for calendar year taxpayers), do not exceed $31 million.2 The election must be made within one year of the bill’s enactment. This change, if enacted, would have a material impact on life sciences, biotech, and other R&D intensive businesses, potentially creating the opportunity for significant tax refunds.
Accelerated Cost Recovery of Unamortized R&D Costs
Finally, unlike the House Bill, the SFC Bill permits all taxpayers who paid or incurred domestic R&D expenses in tax years beginning on or after January 1, 2022, and before January 1, 2025, to elect to deduct any remaining unamortized amount of such expenses over a one- or two-year period (at the taxpayer’s election), accelerating the benefit of such R&D expenses.
Please contact Wilson Sonsini attorneys Myra Sutanto Shen, Greg Broome, Derek Wallace, Jonathan Zhu, or any other member of the firm’s Tax practice to discuss the potential implications of the changes to Section 174 in the SFC Bill.
[1] All Section references are to the Internal Revenue Code of 1986, as amended, as of June 23, 2025.
[2] The SFG Bill defines an “eligible taxpayer” as any taxpayer who is not a tax shelter and who meets the gross receipts test described in Section 448(c) for the first taxable year beginning after December 31, 2024.
