When Congress passed the Tax Cuts and Jobs Act (TCJA) back in 2017, companies were forced to capitalize and amortize their domestic Research and Development (R&D) expenses over five years instead of immediately deducting them. This change created a substantial cash flow burden that made it more difficult for businesses to invest in the cutting-edge research that drives growth. What used to be a straightforward deduction became a cash flow headache, particularly for startups and R&D-heavy industries like biotech, software, and manufacturing.
That all changed with the recent passage of the “One Big Beautiful Bill Act” (OBBBA). With strong bipartisan support, OBBBA delivered long-awaited relief: the restoration of immediate spending for domestic R&D. For innovative companies, this shift is nothing short of transformative. But the real impact of OBBBA lies in the mechanics: how prior years’ costs are treated, what choices taxpayers have going forward, and how R&D credits fit into the picture.
Key R&D Provisions of OBBBA
Immediate Expensing Is Back
The core provision of the OBBBA is its permanent restoration of immediate expensing for domestic R&D costs. For tax years beginning after December 31, 2024, businesses can once again deduct their qualifying R&D expenses in the same year they incur them. That means companies won’t have to spread deductions over multiple years, freeing up cash for reinvestment in talent, technology, and product development.
It’s worth noting, however, that foreign R&D doesn’t get the same treatment. Expenses tied to research conducted outside the U.S. must still be amortized over 15 years. This creates a clear incentive to keep innovation activities in the country, a policy choice designed to boost domestic competitiveness.
Treatment of 2022–2024 Capitalized Costs
The OBBBA also addresses the period from 2022 to 2024, during which companies were forced to amortize their R&D costs. The bill offers several options for businesses to recover these previously capitalized expenses:
- Companies can elect to deduct all unamortized R&D costs from 2022-2024 in the tax year beginning after December 31, 2024.
- Alternatively, they can elect to spread the deduction of these unamortized costs over a two-year period.
Meanwhile, small businesses, or those with average annual gross receipts of $31 million or less, may retroactively apply the new expensing rules by amending their 2022–2024 returns by July 4, 2026.
The "No Double Benefit" Rule
What Counts as “Qualified Research” Under the OBBBA?
To benefit from the R&D tax incentives, a company’s activities must meet the definition of “qualified research” as set forth in the Internal Revenue Code. For purposes of the R&D tax credit, this is determined by the “Four-Part Test” under IRC §41(d)
- Permitted purpose: The activity must aim to improve a product, process, software, or technique in terms of function, performance, reliability, or quality.
- Technological in nature: The research must rely on the principles of the hard sciences, such as engineering, computer science, or physical or biological sciences.
- Elimination of uncertainty: The activity must be intended to discover information to eliminate technical uncertainty about the development or improvement of a business component.
- Process of experimentation: The research must involve a systematic process of testing, trial and error, or other experimentation to evaluate alternatives and resolve uncertainty.
It is important to note that while these criteria are used to determine eligibility for the R&D tax credit, the definition of research or experimental expenditures eligible for immediate expensing under the OBBBA (and IRC §174A) is broader. All activities that qualify for the credit will also qualify for expensing, but not all expenses eligible for expensing will necessarily qualify for the credit. Careful analysis is required to determine which activities and costs meet the more stringent requirements for the credit versus those that are simply eligible for expensing.
How Scrubbed Can Help You Maximize These Benefits
The OBBBA provides powerful new tax advantages but only if you can navigate the rules strategically. At Scrubbed helps, we help businesses unlock the full value of these provisions through:
- Smart tax planning – We evaluate your options for recovering 2022–2024 capitalized costs and recommend the best path to maximize cash flow.
- R&D credit optimization – Our experts identify which activities and expenses qualify for credits vs. expensing, ensuring you capture every benefit.
- Documentation and compliance – We build the audit-ready support you need to substantiate R&D claims with confidence.
- Flexible support for growing companies – From startups to scaling businesses, we help you leverage small-business provisions while planning ahead for growth.
The Start of a New Era for R&D Investment
The One Big Beautiful Bill Act marks a new era for American innovation, providing a powerful incentive for companies to invest in R&D. By restoring immediate expensing, it frees up cash flow and gives businesses the certainty they need to make bold, long-term investments. This is a tremendous opportunity for companies to accelerate their growth and stay ahead of the competition.
Discover how your business can leverage the OBBBA and the R&D tax credit to its full potential, schedule a consultation with Scrubbed and speak with our tax experts today.
