OBBA and R&D Expense Deductions: A Big Win for Innovation

The One Big Beautiful Act (OBBA) introduced many tax changes, but one of the most important for businesses—especially startups and innovators—is its overhaul of R&D (Research & Development) expense deductions.

For years, U.S. companies have argued that the tax treatment of R&D discouraged investment. OBBA takes a major step in reversing that trend, giving businesses more flexibility and incentives to innovate.

Research with microscope 

What Changed Under OBBA?

Before OBBA, businesses had to capitalize and amortize R&D expenses over multiple years—spreading out deductions and reducing the immediate tax benefit.

Starting in 2025, OBBA allows:

• Full expensing of domestic R&D costs in the year they’re incurred.

• Retroactive relief for many small businesses, allowing them to go back and deduct R&D expenses from prior years (instead of being forced to amortize).

• A continued requirement that foreign R&D costs be amortized, to encourage domestic investment.

Why This Matters

Innovation is expensive. Whether you’re developing new software, testing prototypes, or running labs, those upfront costs can be significant.

With OBBA’s changes:

• Companies can recover cash more quickly by deducting expenses in the year they spend them.

• Startups and small businesses gain a major boost, since cash flow is often the difference between growing and shutting down.

• The U.S. tax code becomes more competitive internationally by rewarding domestic research.

Example

Imagine a small biotech company spends $2 million on qualified domestic R&D in 2026.

• Under pre-OBBA rules, that $2 million might have been deducted slowly over 5 years or more.

• Under OBBA, the company can deduct the full $2 million immediately, reducing taxable income dramatically and freeing up resources to reinvest in more R&D.

Strategic Considerations

• Document carefully: The IRS requires clear records of R&D activities and expenses. Good documentation will be critical to maximize the deduction.

• Look backward: If you’re a small business that incurred R&D expenses in recent years, check whether you qualify for retroactive deductions.

• Plan forward: Because OBBA favors domestic research, businesses may want to re-evaluate whether to keep R&D in the U.S. versus overseas.

Final Thoughts

By restoring full expensing for domestic R&D and offering retroactive relief for smaller firms, the OBBA marks a turning point for U.S. innovation policy.

For companies that rely on research and development, this is more than a tax change—it’s a chance to accelerate growth, strengthen cash flow, and invest more boldly in the future.

If your business does any kind of R&D, now is the time to talk with your tax advisor and make sure you’re positioned to capture these benefits.