OBBB Changes to R&D 

The One Big Beautiful Bill (OBBB) has restored the long-standing rule that lets U.S. companies deduct their domestic research and experimental costs in the same year the money is spent. 
That simple shift carries big implications for both pre-revenue startups and profitable mature businesses. 
At Anomaly we are excited for these changes which will help many businesses retain more heard earned cash and increase their research and development tax credit!

1. What Changed?

 

After TCJA, those with R&D has to capitalize their expenses starting in 2022, leading to a increased tax bill.  That is now reversed back to pre TCJA law.

 

Beginning with tax years that start after 31 December 2024, a business may

• deduct 100% of qualified domestic research and experimental costs when paid or incurred, or
• Foreign-sourced research stays on the 15 year amortization schedule. 

 

If you were forced to capitalize domestic R&D expenses in 2022, 2023, or 2024, you now have a choice: file amended returns for those years or take a one-time catch-up deduction spread over one or two years starting in 2025.  Note - if you are over $31M, let's chat further as its more complex. 

 

The law also realigns Section 174 with the Section 41 research credit. For tax years beginning after 2024, you once again decide each year whether to (a) claim the full credit and reduce the related deduction or (b) take the reduced-credit election allowed by section 280C.

 

Finally, Congress added a relief provision for smaller companies. Taxpayers whose average gross receipts over the prior three years do not exceed $31M may file amended 2022–2024 returns instead of waiting for the catch-up.

2. Why it matters for startups

A pre-revenue software company plans to spend $600k on U.S. engineering wages in 2025. 

 

Under the Tax Cuts and Jobs Act (TCJA) regime, only one-fifth of that spend could be deducted in the first year, so the company would carry four hundred eighty thousand dollars of cost into future years. 

 

When revenue finally arrived, the deferred deduction would create artificial taxable income at exactly the wrong time...early cash-flow years when capital is tight.

 

OBBB wipes out that mismatch. The entire $600k becomes a deduction in 2025, likely creating a net operating loss that can shield future profits. 

 

Just as important, the research credit is now computed on the same wage base without having to add it back into taxable income, so the credit itself is larger.

 

Founders should model two scenarios for their capitalized 2022–2024 costs:

 

• Amended returns may generate immediate refunds IF You paid tax.  You cannot amend to claim the payroll tax credit, so the credit would be an income tax credit carryforward. 
• Catch-up deduction in 2025 could produce a sizeable loss that carries back (where allowed) or forward to the first profitable year.

 

Run the numbers before deciding (we can help)!

3. Why it matters for profitable businesses

Consider a medical-device company with steady profits and a 24% federal rate (an S Corp). The company spends $4m per year on domestic research. 

 

Under the TCJA rules,  1/5th of that cost was disallowed in year one, raising cash tax by $768k.

 

Under OBBB, the $4M is deductible in the current year!  Coupled with the IRC 41 R&D Credit...we are now in great shape. 

 

4. Costs that qualify for immediate deduction & the R&D Credit

• Wages, bonuses, and payroll taxes for engineers, computer scientists, product designers, and lab technicians working to resolve technical uncertainty.
• Prototype materials and supplies that are consumed during experimentation, such as 3-D-printed parts, chemicals, or test boards.
• Cloud-hosting fees, specialized software licenses, and other indirect costs directly tied to the research environment.
• Rent, utilities, and depreciation for facilities or equipment used exclusively in experimental work.
• Legal fees for patent applications when the underlying invention is part of the research project.

5. Costs that do not qualify for R&D Credits

• Market studies, focus groups, customer-satisfaction surveys, and similar commercial research.
• Post-production bug fixes, routine maintenance releases, and quality-control testing of finished goods.
• Funded research where the taxpayer does not retain substantial rights in the results.
• Acquisition of land, buildings, or depreciable property that will outlast a single research project.
• Any portion of an employee’s time spent on general administration, human resources, finance, or marketing, even if the employee is housed in the R&D department.

6. You've Never Claimed R&D & are Profitable.  How should I think about this?

 

If your company has paid steady federal income tax but has never pursued the research credit, the OBBB changes make this the moment to act. 
A profitable business can now claim an immediate deduction for qualifying domestic research under §174 while also securing the §41 credit for the same costs. 
At Anomaly, we have extensive experience here and are happy to evaluate if a R&D Tax Credit Study is worthwhile pursuing!  The study ultimately qualifies you but we can routinely pre-vet before engaging in the study. 

 

The four-part test in (in plain English)!
For a project in your business to qualify for the R&D Credit, we MUST pass these 4 part tests.  Don't fall for the trap of "I'm not a cool R&D company, I don't qualify".  You might!

 

1. Permitted purpose
   1.  The work aims to create or improve a product, process, technique, formula, invention, or software that will be used in your business or held for sale.
2. Technological in nature
   1.  The effort relies on principles of physical science, biological science, computer science, or engineering. The tax rules care about the hard science underpinning the work, not the marketing vision around it.
3. Elimination of uncertainty
   1.  At the outset you faced uncertainty about capability, method, or appropriate design. Routine data entry or cosmetic tweaks do not count.
4. Process of experimentation
   1.  You used a systematic process, such as modeling, simulation, trial and error, or prototypingt o resolve that uncertainty. 

Documentation can be informal (time sheets, sprint notes, version-control logs) but must tie directly to these four prongs.

 

Industries and project types that often qualify based on our experience:

 

Below is a short, non-exclusive list mapped to the niches we serve. 

 

• SaaS platforms building new architecture, machine-learning features, or proprietary APIs
• Fintech companies refining payment rails, fraud-detection algorithms, or compliance engines
• E-commerce and logistics businesses optimizing fulfillment software or warehouse robotics
• Digital marketing firms creating predictive-analytics tools or automated ad-buy engines
• Clean-tech startups designing battery chemistries, energy-storage controls, or carbon-capture systems
• Medical-device makers prototyping sensors, wearables, or patient-monitoring software
• Food and beverage producers developing plant-based alternatives or shelf-life extensions
• Manufacturing shops implementing additive manufacturing or novel production lines for consumer products
• Agriculture-tech ventures engineering precision-spray drones, soil-analysis hardware, or crop-modeling software
• Speciality construction/development work
• AI Companies

 

Even mature firms in these sectors often overlook projects that qualify because the work is folded into day-to-day operations. 

 

Putting it all Together

 

R&D is back with vengeance!  Whether you want to look at amending the prior year capitalization fixes or sign up for an R&D study for the first time, we are here to help! 

Sign up here for a Free Pre-Qualification Analysis

Sign up here for Amended Return Analysis