R&D Looks Different Now that the One Big Beautiful Bill Act Has Been Passed

Innovation is everywhere — we see it in the headlines nearly every day. But you don’t need to be developing artificial intelligence or quantum computing to be innovative. Developing new products, making improvements to existing products, or improving manufacturing processes can qualify as research and development (“R&D”).

The challenge?

Innovation can be expensive. That’s why R&D incentives can be game-changers for businesses.

In this article, we’ll answer the following questions:

• What is research and development?
• What is the R&D tax credit?
• What is the R&D deduction?
• Can you take both the R&D credit and the R&D deduction?
• What planning opportunities for R&D are there now that the One Big Beautiful Bill Act (“OBBBA”) has been passed?

What is research and development?

Research and development is the process of experimentation and innovation to create or improve a product, process, technique, or computer software. It often involves tackling uncertainty and testing potential ideas through the use of the scientific method. The IRS categorizes R&D costs for two distinct purposes: (1) so that businesses can claim a tax credit, and (2) so that they can deduct it as a business expense.

What is the R&D tax credit?

Since 1981, businesses performing qualified R&D activities have benefited from the federal R&D tax credit. The activities eligible for the credit must meet the following four-part test:

1. Permitted purpose: The research must be related to a new or improved business component, which can be a product, process, computer software, technique, formula, or invention. The purpose of the research must be to develop or improve the function, performance, reliability, or quality of a business component.
2. Technological in nature: The activity must rely on the physical or biological sciences, engineering, or computer sciences.

3. Elimination of uncertainty: The research must be aimed at eliminating uncertainty concerning the capability of development, method of development, or the appropriateness of design of the new or improved business component.
4. Process of experimentation: The research must involve the evaluation of more than one alternative designed to achieve a result where the means of achieving that result is uncertain at the outset.

The R&D tax credit provides a dollar-for-dollar reduction in federal income tax liability. Qualified small businesses can elect to use their R&D credit to offset payroll taxes instead, which can be a great benefit for startups that don’t yet owe any income tax.

What is the R&D deduction?

Businesses may also benefit from an R&D tax deduction. R&D deductions are no different than the deductions for other types of business expenses: they help offset earnings and reduce taxable income.

For most of US tax history, R&D expenses have been fully deductible. The IRS recognized R&D costs as ordinary and necessary business expenses and let taxpayers deduct them on their tax returns, fully, in the year they incurred those costs.

Beginning in 2022, taxpayers could no longer immediately deduct R&D expenses. Instead, they were required to amortize those expenses (i.e., spread them out) over a period of five years — or 15 years if the R&D activities were performed outside of the United States.

Recently, though, the law reverted — at least for domestic R&D activities. For tax years beginning after December 31, 2024, taxpayers can once again immediately and fully deduct domestic R&D expenses on their tax returns.

Can you take both the R&D credit and the R&D deduction?

Yes, you can take both the R&D tax credit and the deduction in the same year — but the IRS won’t give you a double tax benefit. You can either (1) claim the full R&D credit, then reduce your R&D expense deduction by the credit you claimed, or (2) take a reduced R&D credit with no adjustment to the R&D expense deduction claimed. Most businesses take the deduction, but are missing out on valuable R&D tax credits.

What planning opportunities for R&D are there now that the OBBBA has been passed?

The changes in the OBBBA provide ample opportunities for tax planning. There is no shortage of planning opportunities in the next few years. If you want to take advantage of these new opportunities but aren’t sure where to start, reach out to your CRI advisor. Our team can get your tax plan underway well before tax season starts so that you can put a plan in place for what to do with those accelerated tax savings.