R&D Tax Incentives Get a Boost: What Business Owners Need to Know
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For innovative businesses, the Research and Development (R&D) tax credit is a powerful tool, offering a dollar-for-dollar reduction in federal income tax liability for activities that develop new or improved products, processes, software, or formulas. It rewards companies for the work they are already doing to become more competitive and efficient.
A Major Win for Cash Flow: The One Big Beautiful Bill Act
The recently passed "One Big Beautiful Bill Act" (OBBBA) has significantly enhanced the financial benefits of conducting R&D. Before this act, the Tax Cuts and Jobs Act (TCJA) required businesses to capitalize and amortize domestic R&D expenses over five years, delaying the full tax benefit and negatively impacting cash flow.
Effective in 2025, OBBBA reinstates the immediate and full expensing of domestic Research and Experimentation (R&E) expenditures. This is a game-changer, allowing businesses to deduct 100% of these costs in the year they are incurred, which can substantially lower taxable income. Furthermore, the act provides retroactive relief:
Small businesses (under $31 million in average annual gross receipts) can amend their 2022-2024 tax returns to immediately expense R&E costs.
Larger businesses can accelerate the deduction of their remaining unamortized 2022-2024 costs over one or two years, starting in 2025.
New IRS Guidance: The "How," Not the "What"
While OBBBA provides the "what," new IRS Revenue Procedure 2025-28 provides the "how". It's important to understand that this guidance is purely procedural. It does not explain:
Which specific business activities meet the IRS's "four-part test" to qualify as R&D.
How to calculate the tax credit itself.
The detailed documentation required to substantiate the claim.
What Rev. Proc. 2025-28 does provide is the official roadmap for businesses to implement these favorable changes. It outlines the automatic accounting method change procedures for:
Adopting immediate expensing for the 2025 tax year and beyond.
Allowing eligible small businesses to retroactively apply immediate expensing by either amending returns or making a "catch-up" adjustment.
Enabling larger businesses to elect to accelerate their remaining unamortized deductions from prior years.
The interplay between the revived immediate expense deduction and the powerful R&D tax credit creates a significant planning opportunity. For clients and prospective clients, please reach out to us and we will help put together the professional team to explore if these new rules that might provide an opportunity for your business. For business owners in general, we recommend that you reach out to our advisors and specialized R&D tax experts to assess their eligibility and quantify this enhanced benefit.
Sources: This summary is based on the following:
The One Big Beautiful Bill Act (H.R. 1), P.L. 119-21: "An Act to provide for reconciliation pursuant to title II of H. Con. Res. 14," enacted July 4, 2025.
Revenue Procedure 2025-28: "Administrative, Procedural, and Miscellaneous guidance providing procedures for making certain elections under... the One, Big, Beautiful Bill Act... for domestic research or experimental expenditures," effective August 28, 2025.