How will the One Big Beautiful Bill Act (OBBB) impact R&D-driven businesses?
The newly enacted OBBB delivers long-awaited relief for businesses investing in domestic research and development (R&D). One of the most impactful changes? The repeal of the Tax Cuts and Jobs Act’s (TCJA) requirement to amortize Section 174 R&D expenses over five years. Starting with tax years beginning after December 31, 2024, companies can once again fully deduct domestic R&D costs in the year they’re incurred.
What’s Changed?
Since 2022, businesses were required to capitalize and amortize domestic R&D expenses over five years. This policy created cash flow challenges and discouraged innovation. The OBBB reverses that, restoring immediate expensing for domestic R&D and realigning tax treatment with the fast-paced nature of innovation.
Key Highlights for Taxpayers
- Immediate Expensing Returns: Beginning for tax years beginning after December 31, 2024, domestic R&D costs are fully deductible in the year incurred—no special election needed.
- Retroactive Relief for Small Businesses: Companies with average gross receipts of $31 million or less over the past three years can:
- Amend 2022–2024 returns (must be done within one year of the bill’s enactment), or
- Take a catch-up deduction in 2025 or split it between 2025 and 2026.
- Accelerated Deductions for Larger Businesses: Companies above the small business threshold can’t amend prior returns, but they can accelerate remaining amortization from 2022–2024 over one or two years starting in 2025.
- Foreign R&D Still Amortized: The 15-year amortization rule remains for foreign R&D, and these costs are still excluded from the Section 41 research credit.
Strategic Considerations
Small businesses should weigh the pros and cons of amending prior returns versus taking the catch-up deduction. Amending could improve cash flow and financial reporting, but it comes with administrative overhead. The catch-up deduction may be simpler and more efficient for businesses with steady cash flow or limited resources to handle amended filings.
Final Thoughts
The OBBB’s revisions to Section 174 signal a meaningful shift in tax policy—one that reaffirms the value of domestic innovation and supports the businesses driving it. For companies in software, biotech, advanced manufacturing, and other R&D-heavy sectors, this is a moment to act. Review your past filings, assess your options, and position your business to take full advantage of the restored expensing rules.
How Can Schneider Downs Help?
Schneider Downs helps businesses identify and claim R&D tax credits across industries like manufacturing, software, logistics, and construction. Whether you need a full study or a review of your current calculation, our team can help you uncover opportunities and maximize your return. For more information contact us at [email protected].
