OBBBA Restores U.S. R&D Expensing (2025 Guide)

What Changed & What to Do

The landscape for research and development (R&D) tax incentives has shifted dramatically with the passage of the One Big Beautiful Bill Act (OBBBA). If your business invests in innovation, understanding these changes and how to take full advantage of them can make a significant difference to your bottom line. This guide explains R&D expensing 2025 under OBBBA and what it means for your planning.

What Was the Old Law?

Before the OBBBA, the Tax Cuts and Jobs Act (TCJA) required businesses to capitalize and amortize domestic research and experimental (R&E) expenditures over five years, starting in 2022. This meant you could no longer immediately deduct these costs, reducing the immediate cash flow benefit of the R&D tax credit. For foreign R&E, the amortization period was even longer – 15 years. While the R&D tax credit under IRC § 41 remained available, the delayed deduction made the credit less valuable in the short term.

What Changed with the OBBBA?

The OBBBA, signed into law on July 4, 2025, permanently restored the immediate expensing of domestic R&E expenditures. Here’s what changed:

• Immediate Expensing: Domestic R&E costs can now be fully deducted in the year incurred, rather than amortized over five years.

• Optional Capitalization: Businesses can elect to capitalize and amortize domestic R&E over at least 60 months, but this is now optional. Be careful with this election as it applies to subsequent years.

• Foreign R&E: The 15-year amortization for foreign R&E remains unchanged.

• Catch-Up Deductions: Any unamortized R&E costs from 2022–2024 can be 100% deducted in tax year 2025, or ratably over the 2025 and 2026 tax years.

• Retroactive Amendments: Small businesses meeting the Section 448(c) gross receipts test can amend returns for 2022–2024 to apply the new rules. The deadline for this is July 4, 2026.

• R&D Credit Remains: The R&D tax credit itself was not fundamentally changed, but the restoration of immediate expensing makes it much more valuable for U.S.-based research.

How Can Business Owners Maximize R&D Credits and Tax Benefits?

1. Deduct Domestic R&E Immediately: Take full advantage of immediate expensing for all domestic R&E costs to reduce taxable income and improve cash flow.

2. Consider Optional Capitalization: If your business expects higher profits in future years, you may elect to capitalize and amortize R&E to smooth taxable income. Make sure to discuss this option with your accountant, as this election applies to subsequent years, unless the IRS authorizes a change.

3. Deduct Previously Capitalized Costs: Don’t miss the opportunity to deduct any remaining unamortized R&E costs from prior years, either all at once or over the 2025 and 2026 tax years.

4. Maximize the R&D Credit: Ensure all qualified research expenses (QREs) are identified and documented. This includes wages, supplies, and contract research. Keep detailed records of research activities and time tracking.

5. Coordinate Deductions and Credits: Not all R&E expenses qualify for the R&D credit, so review your activities with your accountant to capture all eligible expenses for both deductions and credits.

6. Amend Prior Returns (If Eligible): Small businesses can amend 2022–2024 returns to apply the new rules, potentially unlocking significant refunds.

7. Plan for Foreign R&D: Since foreign R&D must still be amortized over 15 years, consider shifting more research activities to the U.S. where feasible.

What Can R&D Credits Be Used For?

1. Offsetting Federal Income Tax: The primary use is to reduce federal income tax liability, typically offsetting 6% to 8% of a company’s annual eligible R&D costs.

2. Payroll Tax Offset for Qualified Small Businesses: Eligible startups and small businesses (QSBs) with less than $5 million in gross receipts for the credit year and no more than five years of gross receipts can use the credit to offset payroll taxes. As of January 1, 2023, the maximum annual payroll tax offset is $500,000.

3. Carrying Forward Unused Credits: Unused credits can be carried forward for up to 20 years to offset future federal tax liabilities

The Bottom Line

The OBBBA has made R&D tax incentives more powerful and accessible for U.S. businesses. By understanding the new rules and taking proactive steps, you can maximize your credits, improve cash flow, and reinvest in your company’s growth and innovation.

The return to full expensing is not just a tax issue—it’s a business opportunity. Companies should integrate tax planning into their budgeting, forecasting, and strategic decision-making processes. This includes evaluating how tax savings from R&D expensing can be reinvested and how they affect valuation in capital raises or acquisitions.

If you have questions about how these changes apply to your business or want to ensure you’re capturing every available benefit, now is the time to act. Contact us today to help!