One Big Beautiful Bill’s New R&D Deductions

The OBBB also known as the One Big Beautiful Bill also known as the American Innovation and Growth Act of 2025 makes a useful change to the R&D deduction rules.

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

Note: The current law says firms must capitalize R&D costs and then amortize the costs over a number of years.

But this change is trickier than you might at first guess. Some complexities exist. Also you have some tax planning opportunites related any existing, capitalized R&D costs your tax return shows.

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

But let’s review how we got here.

R&D Deductions Pre-2022, The Golden Era

Prior to January 1, 2022, taxpayers had two primary options for handling R&D expenses:

1. Taxpayers could deduct R&D expenses in the year incurred. This applied to in-house R&D costs and certain contract expenses, and was the most common treatment.
2. Alternatively, businesses could elect under §174(b) to amortize R&D over at least 60 months.

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

R&D Deductions 2022 – 2024, The Dark Era

From 12/31/2021 through 12/31/2024, tax law required taxpayers to capitalize R&D costs. Those costs were amortized over 60 months if domestic R&D and over 180 months if foreign R&D.

That all sounds reasonable enough. But some practical observiations about the capitalization policy. The policy:

• Increased the tax burden for tax payers involved in R&D activities
• Reduced cash flow reinvested in R&D activities, thereby hindering innovation
• Burdened firms with complex accounting treatment
• Boosted tax return preparation fees
• Increased chance of tax return errors due to limited IRS guidance

The good news is R&D expenses are, potentially, immediately 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 capitalization policy of TCJA. Further, it allows taxpayers the ability to deduct still capitalized R&D costs from 2022 – 2024.

Domestic R&D

Domestic R&D costs, generally, qualify for immediate expensing if they meet the definition of R&D expenditures, which include:

• Wages paid to employees directly engaged in qualified research
• Supplies used in the conduct of research
• Contracted research
• Software development costs
• Cloud computing and data hosting costs

Activities must be performed in the United States or a US territory, including contractor work, for immediate expensing.

Foreign R&D

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

• Wages paid to employees outside of the United States (frequently in Canada, India, UK, and other EU countries)
• Third party vendors or contractors located outside of the United States
• Foreign software development costs
• Materials and supplies used in foreign R&D activities

Note, too, foreign R&D costs no longer qualify for R&D credits beginning 1/1/2025.

Reversing 2022 – 2024 Capitalization

The OBBB introduced two methods to claim R&D deductions that were missed during the capitalization period.

Method 1, Small Business Amendment Option

This allows small taxpayers (average 3-year revenue under $31 million) to file an amended return for any of the open 2022 – 2024 tax years to expense 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 greater IRS examination risk.

Our recommendation is to look at the taxpayer’s marginal tax rate in the year in question to see if it makes sense to amend.  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, amending may make the most sense.

Method 2, Catch-Up Deduction Election

This method allows any taxpayer, big or small, to either:

1. Deduct 100% of the unamortized basis of capitalized R&D in 2025, or
2. Deduct 50% of the unamortized basis 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 option with a lower amount of examination risk.

With this method, however, the taxpayer won’t realize the tax benefit until they file their 2025 or 2026 tax returns, which will occur in 2026 or 2027.

You will want to do some forecasting to optimize this.  It probably doesn’t make sense to spread the deduction over two years if you anticipate 2025 to be a big income year and 2026 to be a small income year, for example.  And you will want to analyze the tax benefits between the catch-up deduction and small business amendment options.

An Example to Illustrate

Say a taxpayer’s tax return capitalized $500,000 of R&D wages in 2024, and then amortized $100,000 of this spending. That leaves $400,000 of yet-to-be-amortized R&D costs at the start of 2025.

This taxpayer chooses between four options:

1. Continue amortizing the capitalized R&D wages at the rate of $100,000 a year.
2. Amend the 2024 tax return and adding the $400,000 of capitalized 2024 R&D wages to the 2024 tax return.
3. Take the $400,000 of still capitalized R&D wages as a deduction all on the 2025 tax return.
4. Split the $400,000 of capitalized R&D wages evenly across the 2025 and 2026 tax returns thereby putting a $200,000 deduction onto each return.

Taxpayers probably with the help of their tax accountants will want to “run the numbers” to see which option delivers the best savings. But the two general rules to consider are, first, sooner is better than later. (This is the ol’ time value of money.) But the second thing to consider is, if a firm can, it wants to use its deductions on the years where the marginal tax rates are highest.

Next Steps

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

• How much unamortized basis is left in capitalized R&D after 2024?
• Try to estimate 2025 and 2026 income
• Compare the income in the period of capitalization to estimated 2025 and 2026 income
• Estimate the tax savings of each period and choose the one with the largest 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 to R&D expensing is hugely consequential. Tens of thousands of small and mid-size business will be affected by this change.

This is one of the most tax-payer friendly developments we’ve seen in years. If you are a tax practitioner, you want to be looking closely at your R&D clients.  If you are a taxpayer involved in R&D activities, you want to be discussing this with your tax preparer.

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