How Financial Reporting Can Inform Tax Policy on the Treatment of Research and Experimentation Expenditures: A Discussion and Recommendations

ABSTRACT This paper analyzes the revisions to Internal Revenue Code (I.R.C.) § 174 under the 2017 Tax Cuts and Jobs Act (TCJA) and the 2025 One Big Beautiful Bill Act (OBBBA). To better understand these revisions, we analyze the historical tax treatment of research and experimentation (R&E) expenditures, congressional intent as it relates to R&E, and parallel research and development (R&D) discussions in the financial reporting standards. Our analysis suggests that although some R&E expenditures benefit subsequent periods, many do not, as there is considerable uncertainty in determining which R&E projects will be successful. The policy under the TCJA requiring capitalization and amortization of R&D expenditures did not reflect the economic reality of these expenditures and had the potential to disincentivize R&D investment. Congress has only partially addressed these issues in the OBBBA, which restores expensing for domestic R&E beginning in 2025 but retains capitalization for foreign research. JEL Classifications: M41; H20; H25.