The One Big Beautiful Bill Act (OBBBA) introduces significant changes to how companies handle Research and Development (R&D) costs, which can have a substantial impact on the restaurant industry. This change allows restaurants to immediately deduct costs associated with developing new recipes, improving kitchen processes, or enhancing web application and customer service technologies, providing immediate tax relief and encouraging ongoing innovation.
Key Changes & Opportunities
1. Immediate Expensing of Domestic R&D Costs
Starting in 2025, restaurants can fully expense their domestic R&D costs as they are incurred.
2. Continued Capitalization of Foreign R&D Costs
Foreign R&D costs will still need to be capitalized and amortized over a 15-year period. Restaurants with significant software development costs overseas may want to evaluate the cost-benefit of continuing to perform these activities offshore.
3. Options for Previously Capitalized R&D Costs
Restaurants that have capitalized their R&D costs from 2022 through 2024 have several options:
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- Elect to deduct all unamortized R&D costs in the first tax year beginning after Dec. 31, 2024.
- Elect to ratably deduct the unamortized R&D costs over a two-year period.
- Qualified small businesses may amend their 2022 through 2024 tax returns to deduct R&D costs in full within their tax year the costs were incurred. With many locally owned restaurants meeting the qualified business threshold, a cash flow analysis should be performed to determine if it is beneficial to amend the three prior years’ tax returns versus taking a deduction in the first taxable year beginning after December 31, 2024.
4. R&D Tax Credit
Restaurants can continue to benefit from the R&D tax credit, which typically provides tax savings of 7-10% of their qualified R&D costs. This credit can be a valuable tool for restaurants investing in new culinary techniques, sustainable practices, or customer experience enhancements.
Example Scenario
Consider a restaurant that has spent $1 million annually on R&D costs since 2022. Under the OBBBA, this restaurant can expect accelerated tax benefits in 2025:
- The restaurant can deduct $2.1 million in unamortized R&D costs from 2022 through 2024.
- Additionally, the restaurant can deduct the current year’s R&D costs of $1 million.
- This results in net R&D credits and deductions worth more than half a million dollars of after-tax benefit in 2025.
Strategic Implications
The OBBBA restores deductibility for restaurants making strategic investments in R&D. This change accelerates deductions for unamortized R&D costs under the prior tax law, providing immediate cash flow benefits and encouraging further innovation in the restaurant industry.
Conclusion
Restaurants should consult with their tax advisors to understand how the OBBBA specifically impacts their operations and to explore opportunities for maximizing R&D tax benefits. Please reach out to your GBQ tax advisor for more details on how recent law changes may impact your business.
By Jeff Waldeck, CPA, Tax & Advisory
Looking for more insight into the One Big Beautiful Bill Act? Check out these resources:
Dishing Out Tax Relief: One Big Beautiful Bill Act Strategies For Restaurant Owners & Operators
OBBBA Provisions To Impact Real Estate, High-Net-Worth Property Owners
New OBBBA Prosions Set To Reshape Payroll Tax Reporting
