Deeper Dive into the “New” World of R&D: What You Need to Know

The One Big Beautiful Bill Act (OBBBA) made it a bit easier for taxpayers to recover R&D costs. Starting in 2025, taxpayers can once again immediately deduct domestic R&D expenses instead of amortizing them over five years. This change significantly enhances the value of the deduction — and many taxpayers may still also qualify for the R&D tax credit.

With renewed attention on R&D planning, it’s worth taking a deeper look. Previously, we covered how the R&D deduction changed and how the R&D tax credit plays alongside it. Today, let’s dig a bit deeper and address the following:

• What are R&D expenses?
• What industries typically conduct eligible research?
• Should you take the credit?

What are R&D expenses?

There are two definitions of R&D expenses: one, for the R&D deduction, and one for the R&D credit. Let’s talk about both.

R&D Tax Deduction

Under IRC Section 174, the definition of eligible R&D expenses is quite broad. Essentially, you can deduct the costs you spend developing or improving a product. And thanks to the OBBBA, domestic R&D expenses are now fully deductible.

Businesses that perform R&D activities domestically can deduct those costs in the year they were incurred — just like other ordinary business expenses (like payroll, rent, and office supplies). R&D expenses performed overseas cannot be deducted immediately; instead they must be capitalized and amortized over 15 years.

But R&D is more tightly defined when it comes to the R&D tax credit.

R&D Tax Credit

To qualify for the credit under IRC Section 41, you must be performing an eligible activity and have eligible expenses.

Eligible Activities

Your R&D activities must meet the following four-part test:

1. Permitted purpose
2. Technological in nature
3. Elimination of uncertainty
4. Process of experimentation

We went into detail about this four-part test here.

Eligible Expenses

Eligible expenses must meet the IRS’s definition of Qualified Research Expenses (QREs), which fall into four categories:

1. Wages
   Wages paid to employees who conduct, execute, directly support, or directly supervise qualified research may qualify for the credit. Just keep in mind that only wages attributable to the R&D activities is eligible — time spent on non-R&D tasks doesn’t count.
2. Supplies
   Supplies like raw materials, tools, and other tangible property used to develop prototypes may be treated as QREs, provided they’re consumed in the research process.
3. Cloud Hosting

Expenses paid for cloud hosting of the development and testing environments.

• Contract Research
  If a business lacks the facilities or expertise to perform R&D internally and outsources that job to a third party, a portion of those costs may qualify as QREs.

What industries typically conduct eligible research?

Many different types of industries are eligible for the R&D deduction and the R&D credit. Some of the most common are:

• Software and technology
• Manufacturing
• Pharmaceutical and life sciences
• Aerospace
• Agriculture

But these aren’t the only industries that are eligible.

The key takeaway is that R&D activity isn’t driven by industry labels; it’s driven by activities. Many businesses perform qualifying research without realizing it. That’s why it’s always good to consult with an R&D professional to determine if your business activities could qualify for the R&D credit.

Should you take the credit?

In most cases, the answer is “yes” — if you qualify. With the credit, you’ll see a dollar-for-dollar reduction of your tax bill, and any unused credit can be carried forward to offset future tax liabilities.

Making the Most of Available R&D Incentives

With the immediate deduction for domestic R&D expenses restored and the R&D tax credit still available to many qualifying businesses, now is a good time to revisit how your organization identifies, tracks, and documents research activities. Contact your CRI advisor to discuss your R&D activities and evaluate whether your business may be positioned to benefit from available deduction and credit opportunities. A proactive approach to R&D planning can help businesses strengthen cash flow, support innovation, and maximize available tax benefits over the long term.