Big Beautiful Breakdown: Take Advantage of R&D Tax Credits
As part of the sweeping “One Big Beautiful Bill Act” signed into law on July 4, 2025, the federal tax framework received a major update. One of the big changes revolves around how research and development (R&D) costs are treated. For companies investing in domestic innovation, these changes unlock powerful tax incentives. Here’s how to make the most of the new R&D tax credit landscape.
Immediate Deduction for Domestic R&D
Under the restored Internal Revenue Code Section 174A, businesses may now fully expense domestic R&D costs in the year incurred—starting with tax year 2025. Foreign R&D continues to require capitalization and amortization over 15 years, but domestic spend now becomes immediately deductible. This is a pro‑innovation move aimed at accelerating investment.
Retroactive Catch‑Up for 2022–2024
The law also allows businesses to accelerate unamortized domestic R&D costs from 2022–2024 into the current tax year. Eligible small businesses—defined as those with under $31 million in average gross receipts—can amend prior returns to claim full deductions for those years. Alternatively, taxpayers can spread catch‑up deductions across the 2025 and 2026 tax years.
Research Credits Still Valuable
While Sections 174 and 41 serve different purposes, the Credit for Increasing Research Activities (the traditional R&D tax credit under Section 41) remains fully available. This credit rewards incremental R&D investment over a baseline calculation, typically ranging from 11% to 16% of qualified spending above the base amount.
Why This Matters for Cash Flow
By combining Section 174 expensing with Section 41 credits, companies can maximize both upfront deductions and refundable/offsetting credits—supercharging cash flow. Corporate beneficiaries, especially large tech firms, are already reporting significant savings. One analysis estimated $148 billion in free‑cash‑flow boosts across S&P 500 firms, with R&D expensing a big driver alongside bonus depreciation and interest deductibility.
Key Strategies for Businesses
- Review and re‑file prior-year returns if eligible small‑business catch‑up applies.
- Upgrade internal tracking systems for Section 41 credits ahead of likely IRS updates to Form 6765 (new reporting standards begin in tax year 2025).
- Coordinate accounting teams to optimize the mix of expensing versus amortization, especially for foreign‑based R&D.
- Plan future R&D budgets knowing that every dollar of domestic innovation can be immediately expensed—making investments more tax-efficient.
Bottom Line
The “One Big Beautiful Bill Act” repositions the U.S. tax code toward innovation—with restored 100% R&D expensing, retroactive relief and ongoing research credits. For businesses committed to growth through innovation in tech, manufacturing, healthcare and software, the benefits are clear. Policy changes offer faster deductible treatment, improved cash flow and stronger financial leverage.
To learn more about and take advantage of every possible benefit under the new law, contact Illumination Wealth today.