R&D Deductions Restored: A New Era for Innovation and Tax Relief

For businesses investing in new or improved products and processes, the tax landscape recently changed for the better. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, delivers a long-awaited win for companies engaged in research and development activities. Most notably, the bill restores full expensing for domestic R&D expenditures, allowing businesses to deduct qualifying costs in the year they are incurred. For eligible small businesses, the change applies retroactively to 2022, potentially unlocking significant refunds from earlier years.

This is a critical moment for companies to re-evaluate their current and prior-year activities. Whether your business is developing software, improving internal processes, or designing new or improved products, the tax benefits tied to those investments may now be far more valuable than most taxpayers realize.

At Strategic Tax Planning, our team works with clients to uncover overlooked R&D expenses, structure claims under the updated law, and identify refund opportunities opened up by the new legislation. With new elections, retroactive provisions, and multiple planning paths now available, a proactive approach can yield powerful results.

Since 2022, the tax code has required businesses to capitalize and amortize domestic R&D costs over five years, a change implemented under the Tax Cuts and Jobs Act (2017). That rule limited the tax benefit of R&D spending and discouraged investment by deferring deductions across future years. Under the OBBBA, this rule has been reversed. Beginning in tax years after December 31, 2024, businesses can once again fully deduct U.S.-based R&D expenses -including wages, contractor costs, and supplies related to qualifying development work - in the year the expense is incurred. Software development expenditures qualify as well. Businesses may also elect to amortize R&D costs over at least 60 months if they prefer a more gradual recognition of deductions.

While the new law offers broad relief for domestic R&D, foreign research expenses remain subject to the 15-year amortization requirement. This distinction underscores a continued policy focus on incentivizing U.S.-based development, and it adds a layer of strategic planning when structuring global R&D operations. Many U.S. businesses offshore software development work and should assess whether to change sourcing approach.

In addition to restoring full deductions under Section 174A, the OBBBA maintains the R&D tax credit under Section 41, which provides a dollar-for-dollar offset for “increasing research activity.” The new law coordinates the definition of qualified expenses so that costs eligible for the deduction are also eligible for the credit. That means businesses can now deduct and credit the same domestic expenditures, as long as they maintain proper documentation.

One of the most impactful provisions in the bill is the retroactive application of immediate expensing for small businesses. Companies with average annual gross receipts under $31 million may elect to apply the new expensing rules to tax years beginning after December 31, 2021. This special election allows qualifying businesses to file amended returns for prior years and claim refunds for previously capitalized R&D costs. The deadline to make this election is July 4, 2026.

Even if a business does not qualify for retroactive application, the law still offers relief. Taxpayers may elect to accelerate the deduction of any remaining unamortized R&D costs from prior years, specifically those incurred between 2022 and 2024, over one or two years starting in 2025.

To fully leverage the changes under the OBBBA, businesses should take the following steps:

• Review past and current R&D activities. Many companies qualify without realizing it, especially those involved in software development, engineering, design, and manufacturing.
• Update accounting methods as needed. The return to immediate expensing is treated as a change in accounting method and must be properly implemented to ensure compliance.
• Coordinate deductions and credits strategically. Careful planning can help maximize the combined value of both while satisfying IRS substantiation requirements.
• Consider the tax liabilities available for offset. R&D credits carry back one year and forward 20, so the extent and timing of the benefit depends on each taxpayer’s circumstances.

At Strategic Tax Planning, we help businesses conduct technical reviews, identify qualifying activities, gather required documentation, and structure their filings to maximize tax savings. Whether you are new to the R&D credit or have claimed it in the past, the rules have shifted, and the potential benefit has never been greater.

The restoration of full expensing for domestic R&D expenditures is a strategic opportunity for many businesses. If your company develops or improves products, processes, or software, this is the moment to re-engage and unlock the full value of your efforts.

Email: info@strategictaxplanning.net
Phone: (202) 455‑6010

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