Details of Public Law 119-21, section 70302 , One Big Beautiful Bill Act

This provision creates a new IRC section 174A to allow a deduction for domestic research or experimental expenditures in the year paid or incurred by the taxpayer during the taxable year beginning after December 31, 2024. The provision defines the term “domestic research or experimental expenditures” as research or experimental expenditures paid or incurred by the taxpayer in connection with the taxpayer's trade or business other than expenditures that are attributable to qualified foreign research activities under the federal research credit as defined in IRC section 41(d)(4)(F).

This provision allows a taxpayer to charge domestic research and experimental expenditures to a capital account and amortize those expenditures ratably over 60 months. The taxpayer may also elect to take the deduction on a prior timely filed return, which would be after December 31, 2021.

This provision would apply the following special rules:

Expenditures for the acquisition or improvement of land or improvement of property used in connection with research or experimentation that is depreciated would not be allowed to apply the deduction.

Expenditures paid or incurred to determine the existence of, location, extent or quality of ore deposits, or other mineral including oil and gas, would not be allowed to apply the deduction.

Amounts paid or incurred for the development of software can be treated as a research or experimental expenditure.

The provision modifies IRC section 174 and replaces the term “specified” with “foreign” to identify research or experimental expenditures. Foreign research or experimental expenditures are required to be amortized ratably over the 15-year period. The definition of foreign research or experimental expenditures is modified to include expenditures which are attributable to qualified foreign research activities under the federal research credit (as defined in IRC section 41(d)(4)(F)).

Additionally, the research credit is amended to add the deduction for domestic research or experimental expenditures (IRC section 174A).

The provision amends IRC section 280(c)(1) to require taxpayers to reduce the deduction for domestic research or experimental expenditures under IRC section 174A by the amount of the research credit allowed under IRC section 41. Deductions for domestic and foreign research or experimental expenditures are also required to be calculated when computing alternative minimum tax under IRC section 56(b)(2).

The provisions and treatment, as described above, related to IRC section 174A, are treated as a change in method of accounting for purposes of IRC section 481.

California does not conform to IRC 174A. California conforms, under the PITL and the CTL, to IRC section 174, relating to research and experimental expenditures, as of the specified date of January 1, 2025, but does not conform to the modification to the federal changes relating to the deduction of research and experimental expenditures.

Additionally, California generally conforms, under the PITL and the CTL, to IRC section 280C, relating to the credit for increasing research activities, as of the specified date of January 1, 2025. However, California does not conform to the federal changes that require the deduction of domestic research or experimental expenditures be reduced by the amount of research credit allowed.

The estimated revenue impact to conform to the above federal provisions would result in the following loss:

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