The 2025 OBBB Act restores immediate expensing for U.S.-based R&D while foreign R&D requires 15-year amortization. Companies can claim catch-up deductions for 2022-2024 domestic expenses, with R&D tax credits offering 14-20% of qualifying expenses as dollar-for-dollar tax reductions.
The One Big Beautiful Bill Act (OBBB) was signed into law in 2025 and has brought significant changes to R&D tax treatment that will impact businesses across the United States. This sweeping tax legislation restores immediate expensing for domestic research and development activities, reversing the amortization requirements that have been in place since 2022.
This transformative legislation creates a new Section 174A specifically for U.S.-based R&D, allowing companies to fully expense these costs in the year incurred rather than capitalizing and amortizing them over multiple years. The impact on business cash flow and tax planning is substantial, particularly for innovation-focused companies that invest heavily in domestic research activities.
Under the OBBB, there's now a clear distinction between domestic and foreign R&D expenditures. U.S.-based research and development activities qualify for immediate expensing under the newly created Section 174A. This provides significant tax advantages for companies conducting R&D within American borders.
Foreign R&D costs must still be capitalized and amortized over a 15-year period, creating a strong incentive for businesses to prioritize domestic innovation. This differential treatment aims to encourage companies to bring R&D operations back to the United States, potentially reversing the trend of offshore research activities that accelerated after the 2017 tax changes.
One of the most valuable provisions in the OBBB is the opportunity for retroactive relief. Companies that capitalized and began amortizing their domestic R&D expenses for tax years 2022 through 2024 can elect a catch-up deduction. This allows businesses to claim previously unclaimed deductions in their current tax year, potentially creating substantial tax savings.
This retroactive provision offers immediate cash flow benefits for businesses that have been forced to amortize R&D expenses over the past three years. The catch-up deduction can be especially valuable for companies with significant R&D investments during this period, as it effectively restores the tax treatment they would have received prior to 2022.
Small businesses get special treatment under the OBBB's R&D provisions. Small businesses (generally defined as a company that earned less than $50 million on average over the last three years) can retroactively apply full expensing to tax years beginning after 2021. This means past tax returns can be amended to recover costs previously spread out over several years.
Small businesses can also apply R&D Tax Credits against payroll taxes – up to $500,000. This is huge for startups that might not have much income tax to offset yet. The payroll tax offset essentially puts cash back into growing companies when they need it most, helping fund continued innovation even before reaching profitability.
The catch-up deduction requires careful planning. Companies that choose this benefit must file specific forms and keep detailed records of their previously capitalized R&D expenses. Catch-up deductions can be claimed in the 2024 tax year, or later if a business so chooses.
Businesses are encouraged to carefully consider the timing of these claims, as they could impact cash flow for the remainder of the year.
While the OBBB changes how R&D expenses are treated for tax purposes, it doesn't change what qualifies as R&D. Activities must still pass the four-part test established by the IRS:
These criteria determine whether given expenses qualify for immediate expensing under Section 174A or for R&D Tax Credits.
Good documentation becomes even more critical under the OBBB due to the enhanced benefits available. Detailed records showing how activities meet the four-part test must be kept. This includes project plans, employee time tracking, test results, and notes about alternatives considered during experimentation.
Catch-up deductions for previously capitalized expenses will require additional documentation. This includes records of costs capitalized in prior years, calculations showing amortization taken to date, and support for the remaining amounts eligible for the catch-up deduction.
Many businesses miss out on R&D credits because they don't realize their everyday activities qualify. Common qualifying activities include:
These activities aren't limited to laboratories or tech companies. They happen in manufacturing facilities, construction sites, food processing plants, healthcare settings, and many other workplaces across America.
R&D Tax Credits directly reduce federal tax bills, dollar-for-dollar, with credit rates between 14% and 20% of qualifying expenses. This makes them much more valuable than deductions, which only reduce taxable income. For example, if a company spends $1 million on qualifying R&D activities, that company could generate between $140,000 and $200,000 in tax credits that directly lower their federal taxes.
Companies can still claim R&D Tax Credits for up to three years back through amended tax returns. This becomes even more valuable when combined with the OBBB's catch-up deduction. If R&D credits weren't claimed during 2022-2024 (when R&D expenses had to be spread out over five years), they can now be filed on amended returns to claim both the credits and the retroactive expensing benefits.
The potential recovery is substantial. Some businesses might reclaim hundreds of thousands in previously unclaimed benefits. But don't wait too long – companies typically have just three years from the original filing date to amend returns, so the window for 2022 tax returns is closing soon.
Startups or early-stage companies can still elect to apply R&D Tax Credits against payroll taxes instead of income taxes. This is significant for companies that are not yet profitable but are investing heavily in innovation. These credits can offset up to $500,000 of the employer portion of Social Security taxes.
To qualify for this option, a company must have:
This provision wasn't changed by the OBBB, providing stability for innovative new businesses.
How the OBBB affects cash flow depends on a company's size, industry, and tax situation:
First, take a close look at current R&D activities and how they are being documented. Make sure systems are in place to identify and document work that meets the four-part test. This includes tracking how technical staff spend their time, keeping project records, and saving evidence of testing and experimentation.
Consider updating documentation to specifically address the requirements for immediate expensing under Section 174A. Domestic and foreign R&D activities may require separation within accounting systems.
Figure out how much the catch-up deduction could be worth for R&D expenses capitalized during 2022-2024. Look at previously capitalized expenses, how much has already been amortized, and what's left. If R&D Tax Credits weren't claimed for these years, calculate potential gains when filing amended returns.
For example, an amortized expense of $1 million on R&D in 2022 may still qualify for $800,000 in unclaimed deductions that could now be taken immediately.
Tax strategies will need to be updated to account for immediate expensing of domestic R&D costs. One might need to adjust their estimated tax payments, revise budgets to reflect improved cash flow, or reconsider when to make certain R&D investments.
Global operations may need to consider whether it makes sense to shift some R&D activities to the U.S. to take advantage of immediate expensing instead of the 15-year amortization required for foreign research expenses.
Based on these calculations, decide whether to file amended returns for 2022-2024. Consider the potential recovery amount, the cost of preparing amended returns, and the risk of increased IRS attention.
Remember, for calendar-year taxpayers, the deadline for amending 2022 returns will likely be in April 2026. Don't miss this opportunity if there's significant money to be recovered.
The OBBB's R&D provisions are complex. This is a perfect time to work with specialists who focus on R&D Tax Credits. They can help companies navigate these changes, identify qualifying activities, calculate potential benefits, and implement effective documentation systems.
Professional guidance is particularly valuable when considering amended returns or planning significant changes to R&D operations in response to the new tax landscape.
There are specific timeframes for capitalizing on the OBBB's R&D provisions. For the catch-up deduction, the election must be made in the tax year that includes July 4, 2025, or the following tax year. For calendar-year taxpayers, this means including the election in either 2025 or 2026 tax returns.
For amended returns claiming R&D Tax Credits from prior years, businesses generally have three years from the original filing date. For 2022 tax returns filed in April 2023, businesses have until April 2026 to file amendments.
Planning around these deadlines is essential to maximize benefits while staying compliant with all filing requirements.
With deep expertise in R&D tax law and the latest OBBB provisions, guides businesses through every step—from identifying qualifying activities to filing amended returns—ensuring companies maximize savings and stay fully compliant.
