The One Big Beautiful Bill (OBBB) restored immediate expensing for domestic research and development costs, significantly improving the value of the R&D Tax Credit. Yet several months after the law’s passage, many companies still have not revisited the opportunity.
During extension season, businesses already reviewing their tax positions have a timely opportunity to reassess whether they qualify for the R&D Tax Credit. Many companies who had never claimed the credit refused to consider it after the Tax Cuts and Jobs Act (TCJA) required R&D expenses to be capitalized and amortized, which reduced the near-term benefit.
OBBB changes that equation. By restoring immediate expensing and introducing additional relief provisions, the law meaningfully improves the economics of the credit. Companies that previously ruled it out may find the opportunity is now far more attractive. Here are five reasons to take another look at the R&D Tax Credit.
1. 100% Immediate Deduction of Domestic R&D Costs
One of the most important changes introduced by the OBBB is the return of immediate expensing for domestic research and experimentation expenditures.
Under the TCJA rules that took effect in 2022, companies were required to capitalize domestic R&D expenses and amortize them over five years. This often increased taxable income in the short term, even when businesses were investing heavily in innovation.
For tax years beginning after December 31, 2024, companies may once again fully deduct domestic R&D costs in the year they are incurred. This improves near-term cash flow and restores the original incentive structure designed to encourage innovation and investment in new technologies.
2. 14% to 20% Federal Tax Credit on Qualified R&D Spending
In addition to deducting R&D expenses, companies may claim gross R&D Tax Credits equal to approximately 14% to 20% of qualified research expenditures (QREs) above a base amount.
Qualified expenditures generally include wages paid to employees performing, supervising or supporting research activities, payments to third-party contractors performing R&D and supplies consumed during the research process.
For companies investing consistently in new or improved product or process development, software engineering, manufacturing improvements or technical innovation, the credits can translate into significant annual tax savings.
3. Up to $500,000 of Payroll Tax Relief for Startups
Early-stage and growth companies may benefit from R&D Tax Credits through the payroll tax election available to Qualified Small Businesses. Eligible startups can apply up to $500,000 of R&D credits annually against payroll taxes, allowing them to benefit from the credit even before generating taxable income.
This provision is particularly valuable for technology companies, manufacturers and other innovation-focused businesses that invest heavily in development during early growth stages.
4. Retroactive Relief for Smaller Businesses
The OBBB also provides relief for smaller businesses affected by the TCJA capitalization rules.
Companies with average gross receipts of $31 million or less over the prior three years may amend tax returns for 2022 through 2024 or take a catch-up deduction in 2025, which may be split between 2025 and 2026. These provisions allow qualifying companies to accelerate deductions and potentially improve near-term cash flow.
5. Up to 20 Years to Use Unused Credits
Even if a company cannot fully utilize the credit in the current year, the benefit is not lost. Unused R&D Tax Credits may be carried forward for up to 20 years, allowing companies to apply them against future tax liability as they grow.
This long carryforward period ensures companies investing in innovation today can still capture the value of the credit in future years.
Now Is the Time to Reevaluate R&D Tax Credits
With the return of immediate R&D expensing under the OBBB, the economics of R&D Tax Credits have changed significantly.
Companies that previously evaluated the credit and chose not to pursue it, stopped claiming it after 2022, or have never conducted an R&D study may now find the opportunity substantially more attractive.
Organizations investing in product development, software development, manufacturing improvements or technical innovation should consider reevaluating their eligibility to ensure they are capturing the full value of available R&D Tax Credits.
How Can Schneider Downs Help?
If your organization has not recently evaluated the R&D Tax Credit, our specialists are available for a complimentary consultation to discuss potential eligibility, review your current activities, and outline the process for identifying and documenting qualified research expenditures. This initial discussion can help determine whether your organization may benefit from the credit and what steps may be required to capture it.
