Missed the R&D Credit in Prior Years? Here’s Your Second Chance
For years, uncertainty surrounding Section 174 made many businesses hesitate to pursue the Research & Development (R&D) Tax Credit and Deduction. Since 2022, complex capitalization rules and compliance burdens left even innovative companies wondering whether the work was worth the effort.
But with the passage of the One Big Beautiful Bill Act (OBBBA), that’s changed. The new law not only restores the ability to immediately expense domestic R&D costs, it also gives qualifying businesses a second chance to claim missed deductions and potentially credit from prior years.
What Does the R&D Credit and Deduction Mean for Your Business?
The R&D Credit rewards companies that invest in innovation—developing or improving products, processes, software, or systems—by providing a dollar-for-dollar reduction in tax liability. For smaller businesses, the credit can even offset payroll taxes, creating immediate cash flow relief.
The R&D Deduction, by contrast, allows you to expense your qualified research costs—such as wages, materials, and contract research—directly against income. Together, these incentives recognize the real cost of innovation and return part of that investment to you.
If your team spends time, money, and expertise improving how your business operates or what it delivers, the R&D Credit and Deduction can turn that effort into meaningful tax savings and stronger liquidity.
What Did the OBBBA Change—and Why Is It So Important?
When OBBBA was signed into law on July 4, 2025, it reshaped the R&D tax landscape.
Previously, companies were required to capitalize and amortize domestic R&D expenses over five years—locking up cash flow.
Now, OBBBA restores the option to immediately deduct those costs for tax years beginning after December 31, 2024.
Even better, it includes flexible transition rules that open new planning opportunities:
You can amend returns for 2022 through 2024 to retroactively claim missed R&D deductions and potentially credits as well.
Unamortized Section 174 expenses from those years can be pulled into 2025 without penalty.
For businesses that paused R&D filings due to uncertainty, this is a valuable second chance—often worth tens of thousands of dollars in tax savings.
What Activities Qualify for R&D?
To qualify, an activity must meet the IRS four-part test:
Permitted Purpose – Developing or improving a product, process, software, technique, or formula.
Technological in Nature – Grounded in hard sciences like engineering, computer science, biology, chemistry, or physics.
Elimination of Uncertainty – Resolving uncertainty about how—or whether—a result can be achieved.
Process of Experimentation – Involving modeling, testing, or iteration—not just cosmetic changes.
Examples of Qualifying Activities
Developing or improving a product or process
Building or enhancing software or algorithms
Experimenting with new materials, robotics, or automation
Process improvements to increase efficiency or reliability
Commonly Eligible Industries
Software & Technology (AI/ML, SaaS, custom platforms)
Manufacturing & Engineering (prototyping, production optimization)
Life Sciences & Biotech (device or drug development)
Agriculture & Food (formulation or process innovation)
Robotics & Hardware / IoT (new device or system design)
What Counts as Qualified Research Expenses?
Qualified Research Expenses (QREs) may include:
Employee wages for those performing, supervising, or supporting R&D work
Supplies and materials used or consumed in testing and development
Third-party contract research costs (usually 65% qualifies)
Prototype or failed batch costs incurred during testing
All qualified research must be performed within the United States, and many states offer additional R&D credits that mirror federal rules.
How Is the Credit Calculated and Applied?
While the formulas can be complex, the basics are straightforward:
There are two main calculation methods: the Regular Research Credit and the Alternative Simplified Credit.
The credit rewards increases in R&D spending—steady-state research yields smaller credits.
The credit can offset income tax and carry forward for 20 years.
For qualifying small businesses, it can also offset payroll tax—a major benefit for early-stage companies still building cash flow.
And because OBBBA restored immediate deductions under §174 while keeping the §41 credit intact, smart planning can layer both for optimal cash-flow and tax impact.
What Should You Do Next?
The OBBBA creates a rare opportunity for innovative businesses to recover missed R&D benefits and strengthen cash flow for the future.
If your company has invested in software development, process improvement, or product development, now is the time to act. The amendment window is limited to one year, and your 2025 return must be filed on time to preserve eligibility.
Accuracy and strategy matter.
We’ll review your facts, calculate your potential benefit, and design a plan that fits your long-term objectives.
