Since the beginning of 2022, companies have been required to capitalize and amortize their domestic Research and Development (R&D) costs over five years and foreign R&D costs over 15 years. Many innovative companies have been burdened by the tax law that required capitalization and amortization of R&D costs. Now that the One Big Beautiful Bill Act (OBBBA) has been signed into law, there will be several R&D opportunities in store for companies looking to pursue ongoing innovation.
Read Also: OBBBA Provisions To Impact Real Estate, High-Net-Worth Property Owners
How Does The OBBBA Impact R&D Costs For Companies Going Forward?
The OBBBA is expected to have an immediate impact to R&D costs beginning in 2025. Below are a few changes included in the legislation.
- Beginning in 2025, companies can fully expense their domestic R&D costs as they are incurred.
- Taxpayers who properly capitalized their R&D costs in tax years 2022 through 2024 have the following options:
- Elect to deduct all unamortized R&D costs from 2022 through 2024 in the tax year beginning after Dec. 31, 2024.
- Elect to ratably deduct the unamortized R&D costs from 2022 through 2024 over a two-year period.
- If the company is a “qualified small business,” the company may amend their 2022 through 2024 tax returns to deduct R&D costs in full within their respective tax year.
- Companies can continue to take advantage of the R&D tax credit, which typically provides tax savings of 7-10% of their qualified R&D costs.
How Might The OBBBA Impact A Company That Has Annually Spent $1 Million On R&D Costs Since 2022?
The OBBBA gives companies the option to elect to deduct all unamortized R&D costs from 2022 through 2024 in the tax year beginning after Dec. 31, 2024. Below is an example of the total net addback (deduction) for a company that has spent $1 million on R&D costs from 2022 through 2025.
Year |
R&D
|
Section 174
|
Tax Net Addback
|
Estimated
|
Tax Cost
|
| 2022 | $1,000,000 | $100,000 | $900,000 | $70,000 | $119,000 |
| 2023 | $1,000,000 | $300,000 | $700,000 | $70,000 | $77,000 |
| 2024 | $1,000,000 | $500,000 | $500,000 | $70,000 | $35,000 |
| 2025 | $1,000,000 | $3,100,000 | ($2,100,000) | $70,000 | ($511,000) |
A company that has been annually capitalizing $1 million of R&D costs since 2022 should expect to receive the estimated R&D credit of $70,000 in 2025, along with a deduction of $2.1 million, representing the unamortized R&D costs from 2022 through 2024. In addition, companies will be able to deduct the current year R&D costs of $1 million. This amounts to net R&D credits and deductions in 2025 worth more than half a million dollars.
The OBBBA will restore deductibility for companies that make strategic investments in R&D costs. Additionally, a deduction would be accelerated for the unamortized R&D cost under the prior tax law.
Contact your GBQ tax advisor to see how your company may be specifically impacted as a result of the tax law changes within the OBBBA and whether you may qualify for a R&D credit.
By Jeff Waldeck, CPA & Leah Rogers, CPA
Looking For More Insight Into The OBBBA? Check Out These Resources:
One Big Beautiful Bill Act Becomes Law
One Big Beautiful Bill Act Includes Changes For Employee Benefits
OBBBA Provisions To Impact Real Estate, High-Net-Worth Property Owners
