If you’ve invested in Research and Development (R&D) in the past few years, which your business likely has in some way or another, there’s good news coming out of Washington.
The One Big Beautiful Bill reinstates immediate expensing of domestic R&E expenses under §174A, reversing the previous mandatory five-year amortization, and includes a powerful provision that allows businesses to retroactively deduct R&D expenses going back to 2022.
That could mean tens of thousands of immediate tax savings, and in some cases, trigger a refund for taxes you’ve already paid.
Let’s break down what’s changing, and how you can take full advantage.
What Counts as R&D?
If you hear “R&D” and think white lab coats and test tubes, you’re not alone. After all, the IRS definition specifically includes the phrase “experimental or laboratory sense” when defining the topic.
However, the definition is much broader than you might think, and many businesses do qualifying work without realizing it.
“Many businesses assume R&D benefits only apply to tech or biotech firms, but we regularly see small manufacturers, SaaS companies, and even consumer brands qualify. With the new law allowing retroactive deductions, it’s a powerful opportunity to unlock cash refunds for work businesses have already done.” – Senior Tax Director, Brian Miller
So long as it involves some level of experimentation and relies on principles of engineering, computer science, biology, or other technical disciplines, qualifying R&D expenses include any domestic activity aimed at developing, improving, or implementing a product, process, technique, invention, or software.
Here’s the official IRS guidance for reference:
“The term ‘research or experimental expenditures’ means those expenditures incurred in connection with a taxpayer’s trade or business in the ‘experimental or laboratory sense,’ and generally includes all costs related to the development or improvement of a product or component of the product. Expenditures represent costs in the ‘experimental or laboratory sense’ if they are activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product.”
Examples of what could qualify include:
- SaaS companies building new features, improving performance, or solving scalability issues.
- Manufacturers testing new materials, improving product durability, or streamlining production methods.
- E-commerce brands creating custom back-end software for inventory or fulfillment.
- Food and beverage companies formulating new products or scaling recipes to mass production.
You don’t need to be doing cutting-edge scientific research to qualify, and the product doesn’t even have to be commercially successful to count. You just need to be trying to solve technical problems in your business through some degree of experimentation.
Looking Back: Why You Might Be Owed Money
In nearly all cases, businesses get to deduct relevant expenses before calculating their year-end tax bill. After all, you’re only supposed to pay tax on profits.
Right?
But before the recent bill passed, businesses doing R&D in the US had to spread those qualified expenses over five years. They’d still get their full deduction, but over time rather than all at once.
Businesses had to make a choice: reclassify their expenses as non-R&D, or take the short-term cash flow hit, and wait to recoup those deductions over the following years.
The bill reverses that rule retroactively, allowing businesses to fully deduct qualified R&D expenses from as far back as 2022.
If you filed in 2022, 2023, or 2024 without deducting those expenses, you have until ~July 2026 to file an amended return and get a refund. That’s cash in your pocket, just for doing something you already did.
What Expenses Can You Deduct?
If your activity qualifies, here’s what the IRS lets you deduct:
- Wages for employees conducting research
- Supplies and materials used in R&D activities
- Contract research expenses
- Software development costs
- Patent development processes
- Testing costs
“If your team has spent time solving technical problems, whether that’s refining software, testing new materials, or scaling production, there’s a good chance you qualify. We’re encouraging every client to re-evaluate prior-year returns now that the rules have changed.” – Senior Tax Director, Brian Miller
What Expenses Are Excluded?
The following doesn’t count:
- Market research or advertising
- Quality control
- Research conducted after a product hits the market
- Activities funded by a third party
- R&D conducted outside the US (special, less favorable rules apply)
Looking Forward: What Other Benefits Are in the Bill?
There’s a lot to be said about the bill, so we wrote a full unbiased summary here.
And while you may or may not have retroactive expenses to trigger tax refunds with, the One Big Beautiful Bill included other benefits as well:
- If you’re planning to upgrade equipment, vehicles, or technology, you can immediately deduct 100% of qualifying asset costs. Prior law only allowed 60%. Additionally, the immediate expense limit was doubled from $1.25M to $2.5M.
- If you operate a pass-through entity, the Qualified Business Income (QBI) is now permanently set to 20%. Limitations and thresholds apply, but most pass-through businesses can effectively remove that portion of income for tax purposes.
- The standard deduction was increased to $15,750 for single filers and $31,500 for married couples filing jointly.
- Individual income tax brackets are now permanently set at present rates.
Don’t Forget About the R&D Tax Credit
Remember: deductions and credits are slightly different. Deductions reduce your taxable income (like a discount), while credits are 1:1 subtractions on what you owe the IRS.
The One Big Beautiful Bill changed how R&D expenses are deducted under section 174 of the tax code.
But there’s a parallel R&D tax credit under section 41, worth up to $500,000 annually.
If your expenses qualify for one, they’re very likely to qualify for the other.
What if You’re Not Sure You Qualify?
Reach out for a free consultation and ask. It costs you nothing, and could put many thousands of dollars back into your pocket.
And if you do? We’re here to help.
Many founders choose to work with us because claiming R&D tax advantages isn’t straightforward. You have to categorize expenses, properly document, and coordinate deductions and credits without double-counting. And even if the effort is worth many thousands of dollars, investing time into tax prep while you could be focused on growth may not be wise.
