Domestic R&D fully deductible 2026-2029

Revolutionary research deduction transforms domestic innovation incentives

The One Big Beautiful Bill Act delivers transformative tax relief for American businesses conducting domestic research and development through Section 70302, which restores immediate spending for U.S.-based R&D expenses. This historic provision reverses the expensive five-year amortization requirement that took effect in 2022, allowing businesses to fully deduct domestic research costs in the year incurred for tax years beginning after December 31, 2024.

The financial impact reaches unprecedented levels for technology companies, manufacturers, and businesses investing in innovation. A software company spending $5 million annually on domestic development can now claim an immediate $5 million deduction instead of spreading it over five years, creating cash flow benefits exceeding $1.75 million in the first year for businesses in the 35% combined tax bracket.

This legislation strategically distinguishes between domestic and foreign research activities. While AI-driven R&D tax credits and immediate expenses now apply to the U.S.-based research, foreign research expenses remain subject to 15-year amortization under the revised rules. This creates powerful incentives for businesses to conduct research activities domestically rather than offshore.

The timing creates urgency for strategic planning. Small businesses with average annual gross receipts of $31 million or less can retroactively apply immediate expenses to domestic R&D costs from 2022 through 2024, while all taxpayers can elect to accelerate remaining unamortized amounts from those years. These transition provisions create opportunities for substantial tax refunds and immediate cash flow improvements.

Understanding the new domestic research expensing rules

The One Big Beautiful Bill Act fundamentally restructures research and development taxation by creating Section 174A, which governs domestic research or experimental expenditures separately from the existing Section 174 that now applies exclusively to foreign research activities. The full text of Public Law 119-21 (One Big Beautiful Bill Act) provides comprehensive statutory details on these changes.

Key features of the domestic R&D expensing structure include:

• Immediate deduction for all domestic research expenses paid or incurred in tax years beginning after December 31, 2024
• Foreign research expenses continue to require 15-year amortization with no immediate deduction available
• Software development costs explicitly qualify as deductible research expenses under the new provisions
• Coordination with research tax credits reduces the deductible amounts by the credits claimed
• Alternative election available to capitalize and amortize domestic expenses over 60 or more months

The legislation defines domestic research as all research and experimental expenditures except those attributable to foreign research within the meaning of Section 41(d)(4)(F). This distinction becomes critical for S Corporations and Partnerships that conduct research in multiple locations.

The domestic focus creates substantial advantages for U.S.-based innovation. Research conducted in domestic laboratories, using domestic personnel, and involving domestic equipment and materials qualifies for immediate expense. In contrast, similar research conducted abroad is subject to the significantly less favorable 15-year amortization requirement.

Calculating your immediate tax savings from domestic R&D expensing

The financial impact of immediate domestic R&D spending varies significantly based on your annual research spending, tax bracket, and business structure. Understanding these calculations helps businesses quantify the cash flow benefits and plan optimal research timing strategies.

Example calculation for a technology startup:

• Annual domestic R&D expenses: $3,000,000
• Business structure: C Corporations
• Corporate tax rate: 21%
• Immediate tax savings: $3,000,000 × 21% = $630,000
• Previous five-year amortization: $600,000 deduction per year = $126,000 annual savings
• First-year cash flow improvement: $630,000 - $126,000 = $504,000 additional benefit

Example calculation for manufacturing business:

• Annual domestic R&D expenses: $8,500,000
• Business structure: Pass-through entity with owner in 37% bracket
• Owner's marginal tax rate: 37% federal
• Immediate tax savings: $8,500,000 × 37% = $3,145,000
• Previous amortization schedule: $1,700,000 deduction per year = $629,000 annual savings
• First-year cash flow improvement: $3,145,000 - $629,000 = $2,516,000 additional benefit

Strategic timing considerations create additional optimization opportunities. Businesses can accelerate planned research projects into 2026 to maximize immediate deduction benefits, while coordinating with other provisions such as enhanced Depreciation and amortization for research equipment and facilities.

The cash flow impact becomes particularly significant for growth-stage companies. A business transitioning from five-year amortization to immediate expense can redirect hundreds of thousands or even millions of dollars from tax payments into additional research, hiring, or business expansion.

Qualifying research activities and expenditure types

The One Big Beautiful Bill Act maintains existing definitions of research and experimental expenditures while explicitly expanding specific categories and clarifying treatment for emerging technologies. Understanding which activities and expenses qualify ensures businesses capture all available deductions while maintaining compliance with IRS requirements.

Qualifying research activities include:

• Development of new or improved products, processes, formulas, inventions, techniques, or software
• Pilot models and prototypes were constructed for testing and evaluation purposes
• Engineering activities related to product design and functionality improvements
• Laboratory research directed toward discovering new technological information
• Scientific research is intended to eliminate technical uncertainty about product feasibility

Software development receives explicit favorable treatment under the new provisions. All amounts paid or incurred for software development qualify as research or experimental expenditures, creating substantial benefits for technology companies, software developers, and businesses creating proprietary systems and applications.

Excluded expenditures that cannot be immediately expensed include:

• Land acquisition or improvements to the land underlying research facilities
• Acquisition or improvement of property subject to depreciation allowances under Section 167
• Mineral, oil, or gas exploration and development activities
• Quality control testing of finished products or routine data collection
• Efficiency surveys or management studies not directed toward technological innovation

The coordination with the Qualified education assistance program (QEAP) creates additional planning opportunities. Businesses can structure employee education and training programs to qualify as research activities when directly related to developing new technological capabilities or improving research methodologies.

Personnel costs constitute the most significant component of qualifying research expenditures for most businesses. Wages paid to employees directly supervising or conducting research activities, including benefits and payroll taxes, fully qualify for immediate expenses under the domestic provisions.

Small business retroactive relief provisions maximize tax benefits

Small businesses meeting specific gross receipts thresholds receive extraordinary relief through retroactive application provisions that can generate substantial tax refunds for the 2022 through 2024 tax years. Revenue Procedure 2025-28 provides detailed implementation guidance for these valuable transition rules.

Eligibility requirements for retroactive relief:

• Average annual gross receipts of $31 million or less for the three prior tax years
• Non-tax shelter status under Section 448(a)(3)
• Meeting the gross receipts test in the first tax year beginning after December 31, 2024
• Filing election by the earlier of July 6, 2026, or the Section 6511 statute of limitations

Eligible small businesses can elect to treat Section 174A as effective for tax years beginning after December 31, 2021, allowing them to immediately deduct domestic R&D expenses that were previously capitalized and amortized under the unfavorable five-year rule. This election requires filing amended returns for all affected prior tax years.

Implementation example for qualifying small business:

• 2022 domestic R&D expenses: $1,800,000 (capitalized under previous law)
• 2023 domestic R&D expenses: $2,200,000 (capitalized under previous law)
• 2024 domestic R&D expenses: $2,500,000 (capitalized under previous law)
• Total deductions previously claimed: $1,300,000 (amortization over multiple years)
• Total deductions available under retroactive election: $6,500,000
• Additional refund potential at 35% rate: $1,820,000

The deemed election rule simplifies implementation for many small businesses. Taxpayers who filed original returns by November 15, 2025, and have already deducted domestic R&D expenses are deemed to have made the retroactive election if they comply with the other requirements, eliminating the need for separate election statements.

Critical filing requirements ensure compliance:

• Taxpayer name and identification number on the election statement
• Declaration of non-tax shelter status under Section 448(a)(3)
• Declaration of meeting the gross receipts test for eligibility
• Statement of chosen method between immediate deduction or capitalization with amortization
• Filing amended returns for all affected tax years showing revised treatment

Strategic coordination with Late C Corporation elections can optimize overall tax benefits for businesses considering entity structure changes while implementing retroactive R&D relief provisions.

Foreign research amortization rules maintain less favorable treatment

The One Big Beautiful Bill Act preserves less favorable treatment for foreign research expenses, maintaining the 15-year amortization requirement under revised Section 174 while providing immediate expensing exclusively for domestic activities. This deliberate policy choice creates powerful incentives for businesses to conduct research within the United States.

Foreign research amortization structure includes:

• Mandatory 15-year straight-line amortization for all foreign research expenses
• No option for immediate expensing regardless of business size or circumstances
• The amortization period begins with the month expenses are paid or incurred
• Recapture provisions apply upon disposition of property related to foreign research

The definition of foreign research follows existing Section 41(d)(4)(F) standards, encompassing research conducted outside the United States, Puerto Rico, or any U.S. possession. Research activities conducted substantially in foreign jurisdictions receive foreign treatment even when directed or funded by U.S. entities.

Geographic allocation methodologies determine treatment for research spanning multiple locations. Businesses conducting portions of research projects both domestically and abroad must carefully track expenses and activities to allocate them between immediate expensing and 15-year amortization categories properly.

Strategic location decisions become more tax important under the new rules. A business conducting $10 million in annual research can save approximately $3 million in first-year taxes by conducting that research domestically rather than abroad, assuming a 30% combined tax rate and comparing immediate expenses against 15-year amortization.

The coordination with Travel expenses creates planning opportunities for businesses with researchers traveling internationally. Proper documentation of where research activities physically occur ensures optimal expense classification.

Software development activities receive particularly favorable treatment when conducted domestically. Technology companies can structure development operations to maximize domestic presence, qualifying substantially all software development costs for immediate expense rather than extended foreign amortization.

Documentation and compliance requirements ensure deduction sustainability

The enhanced domestic R&D expensing benefits require meticulous documentation to withstand IRS scrutiny and ensure full deduction sustainability through audits and examinations. Revenue Procedure 2025-28 establishes specific requirements for elections and ongoing record-keeping.

Essential documentation categories include:

• Contemporaneous project records detailing research objectives, methodologies, and technological uncertainties addressed
• Detailed expense tracking, separating domestic and foreign research activities
• Personnel time records documenting employees' hours spent on qualifying research
• Supply and equipment purchase records with clear research purpose documentation
• Contract research agreements showing services performed and the location of activities

The small business retroactive election requires comprehensive filing statements containing taxpayer identification information, non-tax shelter declarations, gross receipts test certifications, and chosen methodology statements. Missing or incomplete election statements can disqualify otherwise eligible businesses from valuable relief provisions.

Amended return preparation demands particular attention to detail. Small businesses claiming retroactive relief must file amended returns for all affected years showing revised research expense treatment, with supporting schedules clearly documenting the basis for deduction changes and ensuring consistency across all related tax forms.

The coordination with Home office deductions and other business expense categories requires careful allocation. Research conducted in home offices or mixed-use facilities needs appropriate cost allocation between qualifying research activities and other business operations.

Annual tax filing procedures incorporate domestic R&D deductions through proper Form 1120 or Form 1065 reporting, with additional schedules and statements as required by Revenue Procedure 2025-28. Pass-through entities must provide owners with adequate information for proper reporting on individual returns.

Transform your research tax strategy for 2026 and beyond

Don't let your business miss out on the unprecedented domestic R&D expensing benefits available through the One Big Beautiful Bill Act. Starting with tax years beginning after December 31, 2024, eligible businesses can claim immediate deductions for domestic research expenses, resulting in millions of dollars in tax savings while supporting American innovation and competitiveness.

Instead's comprehensive tax platform makes it easy to track your qualifying domestic and foreign research expenditures, calculate optimal election strategies, and ensure full compliance with the requirements of Revenue Procedure 2025-28. Instead's intelligent system automatically identifies coordination opportunities with research tax credits, bonus depreciation, and other valuable business provisions under the new legislation.

Get started with Instead's pricing plans today to maximize your domestic R&D benefits while building a comprehensive tax strategy that supports your business growth and long-term success.

Frequently asked questions

Q: How much can my business save annually with domestic R&D expenses?

A: Your savings depend on your domestic research spending and tax rate. A business spending $5 million annually on domestic R&D in the 35% tax bracket saves $1.75 million immediately, compared to only $350,000 annually under five-year amortization. Most technology and manufacturing businesses save between $500,000 and $3 million annually, depending on their research intensity and tax situation.

Q: Can small businesses claim retroactive benefits for 2022 through 2024 research expenses?

A: Yes, small businesses with average annual gross receipts of $31 million or less can elect retroactive treatment for domestic R&D expenses from 2022 through 2024. This requires filing amended returns that show immediate expense rather than amortization, potentially generating refunds exceeding $1 million for research-intensive small businesses.

Q: What happens to foreign research expenses under the new legislation?

A: Foreign research expenses remain subject to 15-year amortization with no immediate expenses available. This creates a substantial disadvantage compared to domestic research, with businesses potentially paying $2 to $3 million more in taxes over time for $10 million in foreign research compared to identical domestic research activities.

Q: Does software development qualify for immediate domestic R&D spending?

A: Yes, the One Big Beautiful Bill Act explicitly treats software development costs as qualifying research expenses eligible for immediate domestic expenses. Technology companies conducting software development in the United States can fully deduct all related expenses in the year incurred, creating substantial tax benefits for the domestic software industry.

Q: What documentation do I need to support domestic R&D deductions?

A: You need contemporaneous project records detailing research objectives and uncertainties, detailed expense tracking separating domestic from foreign activities, personnel time records for qualifying research hours, and supply and equipment purchase records. Small businesses claiming retroactive relief must file comprehensive election statements and amended returns with supporting schedules for all affected years.