Key points covered in this article:

  • The OBBBA reinstates full expensing for domestic R&D costs starting in 2025, with retroactive opportunities for small businesses to amend returns for 2022–2024.
  • The R&D tax credit is now permanent, offering significant savings for businesses engaged in technical problem-solving, with startups able to offset payroll taxes.
  • Additional provisions like 100% bonus depreciation and expanded Section 179 expensing provide further opportunities for businesses to manage costs and invest in innovation.

The One Big Beautiful Bill Act, or OBBBA, makes important updates to the tax code. The biggest change for many companies is the return of full expensing for research and development costs, along with the R&D credit being made permanent. These two provisions lower the cost of innovation and free up cash that can go right back into research. OBBBA also extends bonus depreciation and Section 179, giving businesses more ways to manage expenses tied to property and equipment. By reviewing the changes, businesses will be better positioned to plan ahead.

The Return of Full R&D Expensing (Section 174)

For decades, companies could deduct research and development (R&D) costs in the same year they were incurred. That changed in 2022, when new rules required R&D expenses to be spread out over five years. This resulted in tied up cash and made it harder for many businesses to keep funding certain projects.

OBBBA reverses that rule for domestic activities. Beginning in 2025, companies can deduct the full amount in the year the costs occur. This is the first time in years that businesses will see the tax savings from research hit their bottom line right away. Costs tied to foreign research must still follow a 15-year schedule.

The law also creates a retroactive opportunity. Smaller companies, defined as those with average gross receipts of $31 million or less over the last three years, can amend returns for 2022 through 2024. By doing so, they may take the full deduction for qualifying costs in those years and potentially receive a refund. To take advantage of this provision, detailed records of projects and expenses will be necessary before filing an amended return.

Larger companies cannot amend prior filings, but they are still able to recover the remaining deductions from the old five-year schedule. Those amounts can be claimed all at once in 2025 or split between 2025 and 2026, giving some flexibility in how the benefits are realized.

Unlocking the R&D Credit (Section 41)

To qualify for the R&D tax credit, a project needs to involve some level of technical work, aim to solve a problem or uncertainty, and use a trial-and-error process to reach a better result. Many companies are surprised to learn their projects meet this standard. A manufacturer improving a production line or a software firm updating an application feature are both examples of activities that may qualify.

The expenses that count toward the credit generally fall into three categories. Wages for employees directly engaged in research make up the largest share. Supplies consumed during development can also qualify. In addition, a portion of payments to outside contractors may be included.

Startups have another advantage under current rules. They can apply up to $500,000 of the credit each year against payroll taxes. This is especially valuable for younger companies that may not yet owe income tax but are still spending on development.

Examples in Practice

R&D incentives do not require an industry-wide breakthrough. They only need to involve technical problem-solving that is new to the business itself. As Andrea Albanese of R&D Tax Savers explained, the standard is “new to your company, not new to the world.”

Many activities that qualify for the R&D credit can also be deducted under Section 174, creating the possibility of a double benefit when expenses are documented properly. The following examples show how broad these opportunities can be:

Example 1: Food Manufacturing

A food manufacturer automated part of its production line, which required programming and testing different approaches to improve efficiency. The work qualified for both the deduction and the credit.

Example 2: Craft Brewery

A brewery tested new processes to cut water use and improve efficiency. This qualified for deductions under Section 174 and for the credit.

Example 3: Distribution and Logistics

A distribution company redesigned its warehouse and added automated tracking. Customizing the software and testing workflows made the costs eligible.

Example 4: Software Development

A software firm added features to an existing platform through trial and error in coding. Wages, supplies, and contractor costs tied to the work qualified.

Additional Considerations

OBBBA makes many other changes to the tax code beyond R&D, including:

  • Bonus depreciation is now permanent at 100% for qualified property acquired and placed in service on or after January 19, 2025.
  • Section 179 expensing has been expanded, with the deduction limit raised to $2.5 million (up from $1.25 million) and the phaseout threshold increased to $4 million.
  • Section 163(j) business interest limitation returns to the EBITDA calculation rather than EBIT.

Strategic Implications

These provisions may create new opportunities for businesses. Companies will want to review current and planned projects to see where R&D expensing, the credit, or accelerated depreciation might apply.

A cost segregation study may also be useful when research or production facilities are involved, since it can accelerate deductions and increase the value of bonus depreciation and Section 179. Businesses are encouraged to discuss this option with their advisors.

Conclusion

OBBBA gives businesses new ways to strengthen their tax position while continuing to invest in the future. With proactive planning and accurate documentation, companies can capture these incentives and use them to stay competitive in a changing marketplace. For more information, contact Dan Chenoweth, Partner on the PBMares’ Credits & Incentives team.

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