The One Big Beautiful Bill Act (OB3) introduces significant tax benefits for many U.S. businesses that invest heavily in research and development (R&D) or software development. It also updates the rules for the Research and Development Tax Credit, including changes to eligibility requirements and how the credit is calculated.
In this post, we’ll take a deep dive into the key changes, explain their potential effects on your business, and highlight steps you can take to make the most of the new OB3 provisions.
Immediate Expensing of R&D Costs (Section 174A)
The new tax law permanently allows immediate expensing of qualified domestic R&D investments for tax years beginning after following December 31st, 2024.
Prior to OB3, the Tax Cuts and Jobs Act of 2017 (TCJA) required businesses to amortize domestic R&D expenses over five years, and foreign R&D expenses over 15 year, which resulted in some businesses facing large tax bills even in years in which they had an operating loss. Even payroll expenses – normally immediately deductible as a compensation expense – had to be amortized over 5 or 15 years for research and development professionals.
Many technology and software companies invested heavily in research and development in their early years, but under the previous rules they had to spread those deductions over several years instead of taking them all at once.
Foreign R&D Costs Must Still Be Amortized over 15 Years
The new law does not change the treatment of foreign R&D expenses as those costs must still be recovered over 15 years. Under the OB3, the updated Internal Revenue Code Section 174 rules allowing immediate expensing to apply only to qualified R&D activities performed in the United States.
As a result, some companies may have a stronger incentive to move certain research and development activities from foreign locations to the U.S.
What R&D Expenses Qualify Under Section 174(A)?
Section 174(a) covers the cost associated with R&D, including employee wages, materials, and overhead.
Under the OB3, businesses can now deduct the full cost of developing software in the US in the same year they spend the money to do so. This change is significant as prior policy requires companies to speed these deductions over several years. This makes planning and cash flow easier, and it rewards companies for investing in innovation domestically.
Expensing of Software Development Activities
The previous Tax Cuts and Jobs Act did not allow immediate expense of R&D costs; it required companies to spread the deduction over several years: 5 years for U.S. projects and 15 years for foreign projects. Even short-term or iterative software projects had to follow this rule.
This made accounting more complicated, slowed down deductions, and put U.S. companies at a disadvantage in fast-moving industries like artificial intelligence. Foreign competitors that aren’t subject to the same rules, or operate in countries with faster deductions, can reinvest tax savings sooner, giving them a financial and strategic advantage. Meanwhile, U.S. companies are stuck waiting years to get the full tax benefit, which can slow growth and innovation.
Now, under OB3, certain domestic R&D costs can be deducted immediately. Examples include:
- Training and validating AI models
- Building and preparing data sets for product development
- Cybersecurity testing for technical purposes
- Creating digital twins
- Certain biotech and life-sciences testing for commercial products
Important note: Section 174(a) only applies to research expenses, not tangible equipment. Equipment is usually recovered through standard depreciation rules (MACRS), though some may qualify for immediate expensing under bonus depreciation or Section 179 depending on the situation.
How To Recover Unamortized R&D Expenses from Prior Years
OB3 allows any business that still has unamortized domestic R&D costs from 2022-2024 to recover them in one of two ways:
- Deduct them in full during the 2025 tax year
- Spread the deduction across 2025 and 2026 tax returns.
Smaller Employers Can File Amended Returns
Additionally, certain small businesses, commonly interpreted to include those with total receipts of less than $31 million over the previous three years, have an additional option: File amended returns for those previous years claiming a full deduction for qualified domestic R&D expenses.
Effect on Section 41 Tax Credits
With the expansion of full expensing under OB3, Section 41 R&D tax credits may become more valuable for businesses.
Before OB3, some foreign R&D expenses could qualify for the credit under §41(d)(1)(A). Now, OB3 limits eligibility to domestic R&D costs that fall under Section 174(a).
In other words, going forward, only U.S.-based R&D expenses that meet the new Section 174(a) rules count toward the Section 41 tax credit.
Payroll Offsets Expanded
The “payroll offset” feature of R&D credits lets businesses apply the credit directly against the cost of paying employees who perform research and development.
This is important because many early-stage technology, software, and AI companies do not yet have taxable earnings against which to apply a deduction or tax credit.
Under current law (including prior Inflation Reduction Act changes), qualified small businesses with less than $5 million in gross receipts and fewer than five years of revenue can apply up to $500,000 of R&D credit per year against employer payroll taxes (Social Security and Medicare).
Additionally, payroll costs eligible for offset now include Medicare taxes, as well as wages and Social Security taxes.
Section 280(C): The OB3 “No Double-Dipping Rule”
Prior to OB3, companies could claim the R&D tax credit without reducing their deductions, so there was no downside in claiming it. Under Section 280 (C), which was amended in the OB3, companies can claim R&D tax credits for tax years starting after December 31, 2024. However, if a company claims the R&D tax credit, it must reduce its Section 174(a) deduction for domestic R&D by the same amount.
This rule prevents companies from benefitting both from the immediate tax credit and then from future year amortization for the same costs.
Tracking and Reporting Requirements
Companies that claim a research credit must still track and report Section 174(A) expenses. This is true whether they elect to deduct these amounts directly or amortize them over time.
Tracking requirements have become stricter and more exacting. The updated IRS Form 6765 for 2024–2026 requires more project-level and business-component detail than previous years.
How AbitOs Can Help
For a clear, optimized R&D tax strategy under the new OB3 rules, contact your AbitOs expert today. We’ll help you navigate the changes, identify opportunities, and make sure you capture every available benefit.
