Maximizing R&D Tax Savings Under the OBBBA

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4th, 2025, brings one of the most significant changes in recent years for businesses investing in research and innovation: 

• Domestic R&D expenditures are now fully deductible for tax years beginning after December 31, 2024.

Before the OBBBA, Section 174 Required:

• Domestic R&D costs to be amortized over 5 years (starting for tax years after December 31, 2021)
• Foreign R&D costs to be amortized over 15 years

This rule often created higher taxable income in the short term and was a burden for companies heavily investing in innovation, including significant compliance requirements.

Key OBBBA Changes for R&D Expenses:

• Domestic R&D costs incurred after December 31, 2024, can be deducted in full in the year incurred
• Foreign R&D expenses are still subject to 15-year amortization requirements
• Taxpayers who have been amortizing R&D expenses may choose to:
• Deduct all remaining unamortized expenses in 2025 via a Change in Accounting Method
• Deduct them ratably over 2025 and 2026 via a Change in Accounting Method
• Elect to amortize R&D costs over a 5-year period
• Additional Relief for Eligible Small Businesses:
• Must have $31M or less in average gross receipts for the three years prior to the first year beginning after Dec. 31, 2024
• Can amend 2022–2024 tax returns to fully deduct R&D costs in those years
• Must file amended returns by July 4, 2026, to elect retroactive application under Section 174A

OBBBA Impacts on the Section 41 Research Credit:

• Domestic R&E deductions must be reduced by the amount of the gross research credit (or taxpayers can elect to claim a reduced credit)
• Small businesses applying Section 174A retroactively must also follow the amended Section 280C(c) rules. 
• Small businesses must amend prior returns to make or revoke a Section 280C(c) election

Procedural Guidance Needed

While the procedure requirements are clear for tax years starting after December 31st, 2024, there will need to be guidance issued for eligible small businesses who still have not filed their 2024 tax returns. Eligible small businesses may need to capitalize R&D expenses on their unfiled 2024 returns followed by filing an amended return to fully deduct the R&D expenditures with a 174A election. There is certainly risk involved with filing a 2024 tax return with R&D costs fully deducted before any guidance is issued, which should be considered by taxpayers and tax preparers. There could be required amendments down the road if taxpayers file the tax return without taking the correct procedural steps.

Planning Opportunities:

• Combine immediate expensing with the Section 41 Research Credit to maximize tax savings
• Review past returns to capture retroactive deductions where eligible
• Adjust budgeting and cash flow planning to take advantage of the new rules starting in 2025

Next Steps:

If you think the R&D tax credit and these new expensing rules could benefit your business, Align Tax Consulting can help you:

• Assess eligibility
• Model potential tax savings
• Implement a strategy to optimize your benefits

Contact our team to explore how this powerful strategy can help optimize your tax situation and boost your bottom line.