Insights

How the One Big Beautiful Bill Impacts Research and Development Costs

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, significantly impacts research and development (R&D) costs by reinstating and expanding tax incentives aimed at fostering innovation, particularly for U.S.-based businesses. Below is a concise overview of its key provisions affecting R&D costs, based on available information:

1. Immediate Expensing of Domestic R&D (Section 174A):
   • The OBBBA suspends the requirement to capitalize and amortize domestic R&D expenses over five years, which was mandated by the 2017 Tax Cuts and Jobs Act (TCJA) starting in 2022. Instead, for tax years beginning after December 31, 2024, taxpayers can:
     • Fully deduct domestic R&D costs in the year incurred, or
     • Capitalize and amortize costs over at least 60 months (or up to 10 years for certain cases).
   • Small businesses with gross receipts of $31 million or less can retroactively expense R&D costs for tax years after December 31, 2021, allowing amended returns to recover previously amortized costs. Companies with capitalized R&D from 2022–2024 can also elect a catch-up deduction, improving cash flow.
   • Foreign R&D expenses remain subject to 15-year amortization, unchanged from current law.
2. Permanent R&D Expensing in Senate Version:
   • The Senate version of the OBBBA, which influenced the final bill, makes immediate expensing for domestic R&D permanent, unlike the House’s temporary provision (2025–2029). This permanency provides long-term certainty, encouraging sustained R&D investment by reducing upfront tax burdens.
   • Posts on X highlight this as a boost for startups and small businesses, allowing them to deduct R&D costs immediately rather than over five years, freeing up capital for innovation.
3. Enhanced R&D Tax Credits:
   • The bill expands the R&D tax credit by broadening eligible expenses, including software development, certain engineering, and design work. This reduces the net cost of R&D activities for businesses, particularly in tech and manufacturing sectors.
   • The credit is described as a tool to compete globally, especially against countries like China, which offers a 200% “super deduction” for R&D.
4. Economic and Industry Impact:
   • Immediate expensing is estimated to accelerate over $20 billion in R&D investment short-term and over $50 billion long-term, fostering innovation in manufacturing and tech.
   • The provisions are seen as pro-growth, supporting 21 million jobs through R&D-driven productivity gains. They incentivize companies to keep R&D in the U.S., countering offshoring trends.
   • However, the bill’s elimination of clean energy tax credits (e.g., 45X) may increase R&D costs for renewable energy firms, as domestically produced clean tech becomes less competitive without subsidies.
5. Fiscal and Economic Considerations:
   • While these R&D incentives reduce tax liabilities, they contribute to the bill’s $2.4–$5 trillion deficit increase over a decade, potentially raising interest rates and crowding out private investment, which could indirectly affect R&D funding.
   • The White House claims the bill’s pro-growth policies, including R&D expensing, will offset deficits through economic growth, though CBO estimates suggest modest GDP gains (0.4–1.2% by 2034).

Summary: The OBBBA lowers R&D costs for U.S. businesses by allowing immediate expensing of domestic R&D, expanding tax credits, and providing retroactive relief, particularly benefiting startups, small businesses, and manufacturers. Permanent expensing ensures long-term investment certainty, but the bill’s deficit impact and clean energy credit cuts may pose challenges for some sectors. For specific tax planning, businesses should consult professionals as the Treasury Department finalizes regulations.

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The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.