One Big Beautiful Bill’s New Research and Development Deductions

The OBBB aka One Big Beautiful Bill aka American Innovation and Growth Act of 2025, introduces a useful change to the R&D deduction rules.

That change? Companies can again deduct research and development costs, or R&D costs, as incurred.

Note: Current law says companies must capitalize R&D costs and then amortize them over several years.

But this change is more complicated than might be imagined at first glance. There are some complexities. You also have some tax planning opportunities related to any existing capitalized R&D costs that your tax return shows.

In this post, I walk you through the newly restored R&D deduction rules. And then I’ll explain not only how to recover deductions from previous years, but also how to maximize the tax savings you enjoy by doing this.

But let’s review how we got here.

Deductions for R&D before 2022, the golden era

Before January 1, 2022, taxpayers had two main options for managing R&D expenses:

1. Taxpayers could deduct R&D expenses in the year they are incurred. This applied to internal R&D costs and certain contractual expenses, and was the most common treatment.
2. Alternatively, companies could choose under §174(b) amortize R&D in at least 60 months.

The ability to allocate R&D expenses immediately had two tax accounting benefits. First, it reduced the taxpayer’s income, which meant it also reduced his tax burden. Second, it simplified accounting by avoiding the complex tracking of capitalization and amortization. Then the rule changed.

Deductions for R&D 2022 – 2024, The Dark Age

From 12/31/2021 through 12/31/2024, tax law required taxpayers to capitalize R&D costs. These costs were amortized in 60 months if it was national R&D and in more than 180 months if it was foreign R&D.

That all sounds pretty reasonable. But some practical observations on the capitalization policy. The policy:

• Increase in the tax burden for taxpayers involved in R&D activities.
• Reduced cash flow is reinvested in R&D activities, hindering innovation.
• Companies burdened by complex accounting treatment
• Improved tax preparation rates
• Increased likelihood of tax return errors due to limited IRS guidance

The good news is that R&D expenses are, potentiallyimmediately deductible again.

The American Innovation and Growth Act of 2025

The American Innovation and Growth Act of 2025, also known as the “One Big Beautiful Bill” or “OBBB” for short, ends the TCJA’s capitalization policy. In addition, it allows taxpayers the possibility of deducting R&D costs still capitalized between 2022 and 2024.

National R&D

Domestic R&D costs generally qualify as immediate expenses if they meet the definition of R&D expenses, which includes:

• Salaries paid to employees directly involved in qualified research
• Supplies used in conducting the research.
• Contracted research
• Software development costs
• Data hosting and cloud computing costs

Activities must be performed in the United States or a U.S. territory, including contractor work, for immediate accounting.

foreign R&D

Foreign R&D costs still need to be capitalized and amortized over 180 months. Some examples of foreign R&D include:

• Salaries paid to employees outside the United States (often in Canada, India, the United Kingdom, and other EU countries)
• Third-party vendors or contractors located outside of the United States
• Foreign software development costs.
• Materials and supplies used in R&D activities abroad

Please also note that foreign R&D costs no longer qualify for R&D credits as of 1/1/2025.

Reverse capitalization 2022 – 2024

The OBBB introduced two methods for claiming R&D deductions that were not made during the capitalization period.

Method 1, small business modification option

This allows small taxpayers (3-year average income less than $31 million) to file an amended return for any of the open tax years 2022 – 2024 for previously capitalized R&D expenses.

This method results in the fastest cash recovery; however, there is some preparation cost for amending previously filed tax returns and possibly increased risk of IRS inspection.

Our recommendation is to look at the taxpayer’s marginal tax rate in the year in question to see if it makes sense to change it. You probably don’t want to do this if the taxpayer’s marginal rate is low. If the marginal rate is high, 35 or 37%, for example, changing it may make more sense.

Method 2, Update Deduction Election

This method allows any taxpayer, large or small, to:

1. Deduct 100% of the unamortized basis of capitalized R&D in 2025, or
2. Deduct 50% of the unamortized base in 2025, and 50% in 2026

The taxpayer must make the election on their originally filed 2025 tax return, making this likely the least expensive and lowest inspection risk option.

However, with this method, the taxpayer will not get the tax benefit until they file their 2025 or 2026 tax returns, which will occur in 2026 or 2027.

You’ll want to make some forecasts to optimize this. It probably doesn’t make sense to spread the deduction over two years if you anticipate that 2025 will be a big income year and 2026 will be a small income year, for example. And you’ll want to look at the tax benefits between the small business recovery and amendment deduction options.

An example to illustrate

Let’s say a taxpayer’s tax return capitalized $500,000 of R&D salaries in 2024, and then amortized $100,000 of this expense. That leaves $400,000 of R&D costs still to be amortized by early 2025.

This taxpayer chooses between four options:

1. Continue to amortize capitalized R&D salaries at a rate of $100,000 per year.
2. Amend the 2024 tax return and add the $400,000 of 2024 capitalized R&D salaries to the 2024 tax return.
3. Let’s take the $400,000 of R&D salaries still capitalized as a deduction on the 2025 tax return.
4. Divide the $400,000 of capitalized R&D salaries evenly between the 2025 and 2026 tax returns, thereby taking a $200,000 deduction on each return.

Taxpayers, probably with the help of their tax accountants, will want to “do the math” to see which option offers the best savings. But the two general rules to consider are: first, earlier is better than later. (This is the old value of money.) But the second thing to consider is that, if a company can, it wants to use its deductions in years when marginal tax rates are highest.

Next steps

Here is a short checklist of things to check if you are involved in R&D activities:

• How much unamortized base remains in capitalized R&D after 2024?
• Try to estimate 2025 and 2026 income
• Compare income in the capitalization period with estimated income for 2025 and 2026
• Estimate the tax savings for each period and choose the one with the greatest benefit.

I should also mention that deducting R&D does not prohibit or limit your ability to claim R&D credits.

As you can see, the change in R&D spending has huge consequences. This change will affect tens of thousands of small and medium-sized businesses.

This is one of the most taxpayer-friendly developments we have seen in years. If you’re a tax professional, you’ll want to take a close look at your R&D clients. If you are a taxpayer involved in R&D activities, you will want to discuss this with your tax preparer.

Want to know how R&D tax credits work? Click this link.