R&D expenses are now fully deductible under the new law

Historic research and development tax relief transforms the innovation landscape

The One Big Beautiful Bill Act delivers transformative tax benefits for American businesses investing in research and development by permanently restoring the immediate R&D expense deduction. This landmark provision eliminates the burdensome five-year amortization requirement that has hampered innovation since 2022, allowing businesses to fully deduct domestic research expenses in the year they're incurred.

Under Section 70302 of the legislation, businesses can immediately write off 100% of their domestic research and experimental expenditures for tax years beginning after December 31, 2024. This represents a fundamental shift in federal tax policy, recognizing that immediate deductibility encourages innovation, accelerates economic growth, and enhances American competitiveness in critical technology sectors.

The tax benefits extend beyond simple immediate deductibility. Small businesses with annual gross receipts of $31 million or less qualify for retroactive relief, potentially reclaiming substantial tax refunds from previous years when they were forced to capitalize and amortize their research investments. Additionally, all taxpayers can elect to accelerate any remaining unamortized R&D deductions from the 2022-2024 period, creating immediate cash flow benefits.

This restoration of R&D expensing aligns perfectly with the One Big Beautiful Bill Act's broader objective of strengthening American manufacturing and innovation. When combined with enhanced Depreciation and amortization provisions and expanded bonus depreciation, businesses can create comprehensive tax strategies that dramatically reduce their innovation costs while accelerating technological advancement.

Understanding immediate R&D expense deductibility

The One Big Beautiful Bill Act establishes clear rules for the immediate deductibility of R&D expenses for domestic research and experimental expenditures. This provision restores the pre-2022 tax treatment, which allowed businesses to deduct research costs as ordinary business expenses in the year incurred.

Key features of immediate R&D expensing include:

• Full deductibility for domestic research expenses in the year incurred
• Permanent elimination of the five-year amortization requirement
• Application to software development costs and qualified research activities
• Coordination with research tax credits under Section 41
• Retroactive relief options for small businesses dating back to 2022

Domestic research encompasses all research and experimental expenditures conducted within the United States, including wages paid to research personnel, supplies consumed in research activities, and contracted research performed by domestic third parties. The immediate deductibility applies regardless of whether the research ultimately succeeds or fails, recognizing that innovation inherently involves risk.

Foreign research costs remain subject to 15-year amortization under the new law, creating a strong incentive for businesses to conduct research domestically. This differential treatment supports American job creation and ensures that federal tax benefits primarily support domestic innovation and competitiveness.

Calculating substantial annual tax savings from R&D expensing

The restoration of immediate R&D expensing creates yearly significant tax savings for businesses across all industries. The exact savings depend on your total research expenditures, business structure, and applicable tax rates under the One Big Beautiful Bill Act.

Example calculation for a technology company:

• Annual domestic R&D expenses: $5 million
• Business entity: C Corporations
• Corporate tax rate: 21%
• Annual tax savings: $5 million × 21% = $1,050,000

Example calculation for manufacturing business:

• Annual domestic R&D expenses: $3.2 million
• Business entity: S Corporations
• Owner's marginal tax rate: 37%
• Annual tax savings: $3.2 million × 37% = $1,184,000

Example calculation for a small software startup:

• Annual domestic R&D expenses: $800,000
• Business entity: Partnership
• Partners' average tax rate: 32%
• Annual tax savings: $800,000 × 32% = $256,000

For businesses with substantial research investments, the annual tax savings from immediate R&D expensing can reach $1.85 million or more for companies spending $5 million annually on domestic research at the highest tax rates. These calculations demonstrate the substantial cash flow impact this provision creates for innovation-focused companies.

Strategic timing considerations maximize your benefits. Research expenses incurred or paid after December 31, 2024, qualify for immediate deduction, making year-end planning essential to optimize your tax position. Businesses should accelerate qualifying research expenditures into the current year when possible to capture immediate deductions.

Qualifying research and experimental expenditures

The One Big Beautiful Bill Act maintains established definitions for qualifying research and experimental expenditures while dramatically expanding the tax benefits available through immediate deductibility. Understanding which expenses qualify ensures you maximize your available deductions while maintaining compliance with IRS requirements.

Qualifying domestic R&D expenses include:

1. Wages paid to employees directly engaged in research activities
2. Supplies and materials consumed during research and experimentation
3. Contracted research expenses paid to third-party researchers
4. Software development costs for new or improved business software
5. Prototype development and testing expenses

The legislation explicitly clarifies that software development costs qualify as deductible R&D expenses, resolving longstanding uncertainty about the treatment of software creation activities. This clarification provides substantial benefits for technology companies, software developers, and businesses creating proprietary software systems.

Notably, the immediate deductibility applies to both successful and unsuccessful research efforts. The IRS recognizes that innovation inherently involves uncertainty and that failed research attempts contribute to the overall knowledge base that ultimately produces successful innovations. This risk-neutral treatment encourages businesses to pursue ambitious research objectives without tax penalties for unsuccessful efforts.

Non-qualifying expenditures under the One Big Beautiful Bill Act include land acquisition or improvements, mineral or oil and gas exploration costs, and property improvements subject to depreciation or depletion. These exclusions maintain consistency with longstanding R&D tax policy while ensuring that immediate deductibility focuses on genuine research and experimental activities.

Small business retroactive relief creates refund opportunities

The One Big Beautiful Bill Act provides extraordinary retroactive relief for small businesses that were forced to capitalize and amortize their R&D expenses during the 2022-2024 period. This provision allows eligible companies to reclaim substantial tax refunds by retroactively applying immediate R&D expensing to prior tax years.

Small business eligibility requirements:

• Average annual gross receipts of $31 million or less for the three prior tax years
• Non-tax shelter status verified through required filing statements
• Timely election filing by July 6, 2026, or earlier statutory deadlines
• Compliance with all documentation and filing requirements

Eligible small businesses can choose between two retroactive relief options. The first option allows immediate deduction of all domestic R&D expenses for tax years beginning after December 31, 2021, potentially creating substantial refund opportunities for the 2022, 2023, and 2024 tax years. The second option permits capitalization and amortization over a minimum 60-month period starting when research benefits are first realized.

Example retroactive relief calculation:

• Small manufacturing company with $25 million average annual receipts
• Capitalized R&D expenses 2022-2024: $2.1 million total
• Previously claimed amortization deductions: $420,000
• Additional refund available: $1.68 million × effective tax rate
• Potential cash refund at 25% rate: $420,000

The retroactive relief provisions require careful compliance with IRS procedures outlined in Revenue Procedure 2025-28. Businesses must file specific election statements with their amended returns, clearly documenting their chosen method and confirming their eligibility status. Professional tax guidance becomes essential for maximizing retroactive benefits while ensuring full compliance.

Critical timing constraints apply to retroactive elections. For tax years beginning in 2022, businesses must file by the earlier of July 6, 2026, or their applicable statute of limitations deadline, which typically expires three years after the original return filing date. This accelerated timeline makes immediate action essential for businesses seeking to reclaim 2022 tax year refunds.

Coordination with research tax credits maximizes benefits

The One Big Beautiful Bill Act creates powerful opportunities to coordinate immediate R&D expensing with enhanced AI-driven R&D tax credits under Section 41 of the tax code. This comprehensive approach ensures businesses capture every available tax benefit while building long-term research capabilities.

Research tax credits provide dollar-for-dollar reductions in tax liability for qualifying research expenses, while immediate R&D expensing reduces taxable income through current-year deductions. The coordination requires careful calculation because Section 280C requires businesses to reduce their R&D expense deductions by the amount of research credits claimed, preventing double benefits on the same expenditures.

Optimal coordination strategy:

1. Calculate total qualifying research expenses for the tax year
2. Determine available research tax credits under Section 41
3. Reduce R&D expense deductions by the credit amount claimed
4. Capture immediate deductibility benefits on net qualifying expenses

Example coordination calculation:

• Total qualifying research expenses: $4 million
• Research tax credits claimed: $280,000
• Reduced R&D expense deduction: $3,720,000
• Tax savings from deduction (at 35%): $1,302,000
• Total tax benefits: $280,000 + $1,302,000 = $1,582,000

The One Big Beautiful Bill Act provides late election relief for small businesses seeking to make or revoke Section 280C elections for the 2022-2024 tax years. This flexibility allows businesses to optimize their coordination strategies retroactively, potentially increasing total tax benefits from research activities conducted during the forced capitalization period.

Accelerated recovery of unamortized R&D expenses

All taxpayers, regardless of size, can elect to accelerate recovery of unamortized R&D expenses from the 2022-2024 capitalization period under the One Big Beautiful Bill Act. This provision creates immediate cash flow benefits by allowing businesses to deduct previously capitalized amounts faster than the original five-year amortization schedule required.

Businesses can choose between two acceleration methods under Section 7.02 of IRS Revenue Procedure 2025-28. The first method allows complete recovery of all remaining unamortized amounts in the first tax year beginning after December 31, 2024, providing maximum immediate tax benefits. The second method permits ratable amortization over two years, spreading the deduction between 2025 and 2026.

Complete recovery method example:

• Unamortized R&D expenses from 2022-2024: $1.8 million
• Recovery method: Full immediate deduction in 2025
• Tax benefit at 28% effective rate: $504,000
• Cash flow improvement: Immediate versus spread over remaining years

Two-year spread example:

• Unamortized R&D expenses from 2022-2024: $2.4 million
• Recovery method: Ratable over 2025-2026
• Annual deduction: $1.2 million per year
• Tax benefit per year at 30% rate: $360,000

The acceleration election operates as an automatic accounting method change, eliminating the need to file complex Form 3115 applications with the IRS. Instead, businesses file simplified election statements with their tax returns, streamlining the administrative burden while capturing substantial tax benefits.

Strategic considerations guide the optimal choice of acceleration method. Businesses expecting higher income in 2025 may prefer full immediate recovery to maximize current-year deductions at higher marginal rates. Companies anticipating income growth in 2026 might choose a two-year spreading to balance deductions across periods with potentially different tax rates.

Domestic versus foreign research treatment differences

The One Big Beautiful Bill Act establishes distinct tax treatment for domestic and foreign research expenses, creating strong incentives to conduct research within the United States. Understanding these differences helps businesses optimize their research location strategies while maximizing available tax benefits.

Domestic research expenses are immediately deductible in the year incurred, providing substantial cash flow benefits and encouraging American-based innovation. This treatment applies to all qualifying research and experimental expenditures conducted within the United States, regardless of where the resulting products or services will ultimately be sold or used.

Foreign research expenses continue to require 15-year amortization under the new legislation, creating significantly less favorable tax treatment than domestic research. This extended amortization period substantially reduces the present value of tax benefits from foreign research activities, making domestic research locations more economically attractive from a tax perspective.

Comparative benefit analysis:

• Domestic R&D expense: $1 million immediate deduction
• Tax benefit at 25% rate: $250,000 in year one
• Foreign R&D expense: $1 million amortized over 15 years
• Annual deduction: $66,667 per year
• Annual tax benefit: $16,667 (versus $250,000 domestic)

The substantial tax advantage for domestic research strengthens the economic case for maintaining or expanding American research facilities. When combined with workforce availability, intellectual property protection, and supply chain considerations, the tax benefits often make domestic research locations significantly more attractive than foreign alternatives.

Businesses with existing foreign research operations should evaluate opportunities for relocating qualifying activities to domestic facilities. The immediate deductibility benefits may justify significant restructuring costs, particularly when combined with the One Big Beautiful Bill Act's enhanced Work opportunity tax credit for hiring American research personnel.

Documentation and compliance requirements

The One Big Beautiful Bill Act requires comprehensive documentation to support immediate R&D expense deductions while ensuring full compliance with IRS requirements. Proper record-keeping becomes even more critical with immediate deductibility available, as the substantial tax benefits create greater potential for scrutiny during examinations.

Essential documentation requirements include:

• Detailed descriptions of research activities and objectives
• Time records for personnel engaged in qualifying research
• Supply and material purchase documentation linked to specific projects
• Contractor agreements and invoices for third-party research services
• Software development specifications and testing documentation

The IRS emphasizes that businesses must maintain contemporaneous records created during the research activities, not reconstructed documentation prepared after the fact. This requirement ensures that companies can substantiate their expense classifications and demonstrate the qualifying nature of their research activities.

Project tracking best practices:

1. Maintain separate accounting codes for research versus non-research activities
2. Document research hypotheses and technical uncertainty being investigated
3. Track experimental approaches attempted and results achieved
4. Preserve laboratory notebooks, design specifications, and testing protocols
5. Retain correspondence with research personnel and contractors

Businesses claiming immediate R&D expense deductions should implement systematic documentation procedures that capture qualifying information as research activities occur. The substantial tax benefits available under the One Big Beautiful Bill Act justify investment in proper documentation systems that protect deductions during potential IRS examinations.

Multi-year planning optimizes long-term benefits

The permanent nature of immediate R&D expensing under the One Big Beautiful Bill Act enables businesses to develop comprehensive multi-year research strategies that optimize tax benefits while advancing innovation objectives. Strategic planning ensures businesses maximize their tax efficiency while building sustainable research capabilities.

Multi-year research planning considerations include timing major research initiatives to align with income levels, balancing research spending across tax years to optimize marginal-rate benefits, and structuring research activities to qualify for both immediate expensing and research tax credits. Businesses should evaluate how R&D investments coordinate with other major tax provisions under the new legislation.

Strategic coordination opportunities:

• Combine R&D expensing with Home office deductions for researchers working remotely
• Coordinate research timing with enhanced Meals deductions for research team meetings
• Align equipment purchases with Section 179 expensing limits for research apparatus
• Structure research compensation to maximize the Qualified education assistance program benefits

Businesses should model their projected research spending over multiple years to identify optimization opportunities. The permanent nature of immediate R&D expensing creates stability for long-term planning, unlike temporary provisions that create uncertainty about future tax treatment.

Entity structure optimization for research businesses

Different business entity structures leverage immediate R&D expensing differently under the One Big Beautiful Bill Act. Understanding how research deductions flow through various entity types helps businesses optimize their overall tax position while maximizing innovation investments.

Pass-through entities, including S Corporations and Partnerships, distribute R&D expense deductions to owners, who claim them on individual tax returns. This creates opportunities for high-income business owners to offset other income sources with research deductions, potentially resulting in effective tax rates above 40% when state taxes are included.

C Corporations claim R&D expense deductions directly at the corporate level, reducing taxable income subject to the 21% corporate rate. This lower rate may appear less beneficial than pass-through treatment. Still, C Corporations gain flexibility in timing research investments and can carry forward unused deductions to future profitable years without limitations.

Entity comparison for research-intensive business:

• Annual R&D expenses: $2.5 million
• S Corporation with owner in 37% bracket: $925,000 tax savings
• C Corporation at 21% rate: $525,000 tax savings
• Partnership with partners in mixed brackets: Varies by partner allocation

Businesses should evaluate whether their current entity structure optimally captures R&D expensing benefits under the new legislation. Some companies may benefit from entity elections or restructuring to align their tax treatment with their research investment strategies. The Act's provisions for Late S Corporation elections and Late C Corporation elections provide flexibility for businesses seeking to optimize their entity structure.

Industry-specific applications drive competitive advantage

The One Big Beautiful Bill Act's immediate R&D expensing creates particular advantages for industries that depend heavily on innovation and technological advancement. Understanding industry-specific applications helps businesses identify optimal strategies for maximizing their competitive position through tax-efficient research investments.

Technology and software companies benefit enormously from the explicit clarification that software development costs qualify for immediate deductibility. This provision eliminates uncertainty that previously complicated tax planning for software development activities, encouraging increased investment in proprietary software systems and platforms.

Manufacturing businesses can leverage immediate R&D expensing for product development, process improvements, and automation research. When combined with enhanced Depreciation and amortization provisions for manufacturing equipment, these businesses can create comprehensive tax strategies that substantially reduce the cost of innovation while improving operational efficiency.

Pharmaceutical and biotechnology companies conducting domestic drug development research gain substantial benefits from the immediate expensing of their extensive research costs. The provision recognizes that drug development involves long timelines and uncertain outcomes, making immediate deductibility particularly valuable for these capital-intensive research activities.

Professional services firms developing new service delivery methodologies, proprietary analytical tools, or client service technologies can claim immediate deductions for qualifying research expenses. This encourages innovation in service delivery while reducing the tax cost of developing competitive advantages in professional services markets.

Transform your research investments starting in 2025

Don't miss out on the unprecedented tax savings available through the One Big Beautiful Bill Act's immediate R&D expense deductibility. Starting with tax years beginning after December 31, 2024, businesses can claim immediate deductions for all qualifying domestic research expenses, potentially saving hundreds of thousands or even millions of dollars annually while accelerating innovation.

Instead's comprehensive tax platform makes it simple to track your qualifying research expenses, calculate your available deductions, and ensure full compliance with the new R&D expensing requirements. Our intelligent system automatically identifies optimization opportunities and helps you coordinate R&D benefits with other valuable business tax strategies under the new legislation.

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

Frequently asked questions

Q: How much can my business save annually with immediate R&D expense deductibility?

A: Your savings depend on your qualifying research expenses and tax rate. Businesses spending $5 million annually on domestic R&D can save between $1.05 million and $1.85 million, depending on their entity structure and tax bracket. Most research-intensive businesses save between $250,000 and $1.5 million annually through immediate R&D expensing.

Q: Can my small business claim retroactive refunds for R&D expenses from 2022-2024?

A: Yes, if your business has average annual gross receipts of $31 million or less. You can retroactively apply immediate expensing to domestic R&D expenses from tax years beginning after December 31, 2021. This may generate substantial refunds of previously capitalized expenses, but you must file the required elections by July 6, 2026, or earlier statutory deadlines.

Q: Do software development costs qualify for immediate R&D expense deductibility?

A: Yes, the One Big Beautiful Bill Act explicitly confirms that software development costs qualify as deductible R&D expenses. This applies to the development of new software products, improvements to existing software, and the creation of proprietary software systems used in your business operations.

Q: How does immediate R&D expensing coordinate with research tax credits?

A: You can claim both immediate R&D expense deductions and research tax credits, but Section 280C requires you to reduce your R&D expense deduction by the amount of credits claimed. This prevents double benefits on the same expenditures. The coordination typically provides combined tax benefits exceeding what either provision would deliver on its own.

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

A: You need contemporaneous records documenting your research activities, personnel time records, supply and material purchases, contractor agreements, and technical documentation showing the experimental nature of your work. The IRS requires documentation created during research activities, not after-the-fact reconstructions.

Q: Can I deduct foreign research expenses immediately under the new law?

A: No, foreign research expenses continue requiring 15-year amortization under the One Big Beautiful Bill Act. Only domestic research expenses incurred within the United States qualify for immediate deductibility, creating strong tax incentives to maintain or expand American research facilities.

Q: How do I elect to accelerate unamortized R&D expenses from 2022-2024?

A: You can elect to either deduct all remaining unamortized amounts immediately in your first tax year beginning after December 31, 2024, or spread the deduction ratably over two years. The election operates as an automatic accounting method change, requiring a simplified statement to be filed with your tax return and eliminating the need for a complex Form 3115.