The big picture
The One Big Beautiful Budget Act (OBBBA), signed into law in July 2025, created a new framework for deducting R&D costs. For a company running at a loss, the change may feel minor today. For a company planning for profitability, an acquisition, or an IPO in the next few years, the choices you make now can meaningfully shape future tax bills.
How we got here
For many years the rules were founder friendly. Companies could generally deduct research costs in the same year they were incurred, which matched the tax treatment to the actual cash going out the door.
That changed in 2022, when a provision from the 2017 Tax Cuts and Jobs Act took effect. It required companies to capitalize their R&D costs and write them off over several years instead of deducting them right away. For research heavy businesses, that created a painful mismatch. Real cash was spent, but the matching tax deduction was spread out over time.
Startups in technology and life sciences felt this the most. Licensing deals, collaboration agreements, and milestone payments often bring in revenue early. Under the old rules that revenue was usually offset by R&D spending in the same year, so there was little or no taxable income. Under the capitalization rules, those same costs were no longer immediately deductible, which left some companies with surprise tax bills in years they expected to be tax neutral.
What the OBBBA actually changes
Immediate expensing is back, but it is not automatic
Under the new framework (Section 174A), companies can once again choose to deduct domestic R&D costs in the year they are incurred rather than spreading them out. The catch is that this is not a default. Both immediate expensing and capitalization require a formal accounting method change filed with the IRS, and once you choose, that method applies for a meaningful period going forward.
Capitalizing still has a place
You can still choose to capitalize and deduct over time. For domestic research the recovery period is broadly similar to the prior rules (about five years), although the mechanics of how that period is measured differ. For foreign R&D, the longer fifteen year write off from the TCJA stays in place.
Why the gap matters: the difference between five year domestic recovery and fifteen year foreign recovery is intentional. It rewards research done in the United States. If you use offshore research, contract research organizations, or foreign subsidiaries, that cost difference is worth factoring into how you structure your operations.
Method change and the annual election
The method change is the commitment point, not a casual checkbox. Depending on your situation it may require a full IRS Form 3115 or a simplified statement. Either way, once you file, you are generally locked into that approach for a period of years, and changing course later requires IRS consent.
Separately, an annual election under Section 59(e) lets you capitalize certain R&D costs and amortize them over ten years. It is slower than immediate expensing and more spread out than the five year approach, but its strength is flexibility. You can make it year by year on a portion of your R&D pool, which helps you manage the timing of deductions around your financial needs each year.
Do not overlook the R&D tax credit
The deduction rules above are separate from the federal R&D tax credit (Section 41), which remains one of the most valuable incentives for companies that develop or improve products, software, processes, or formulas. The credit is claimed on top of your deduction approach, and qualifying expenses can include wages, supplies, contractor costs, and certain cloud computing.
Eligible startups can be especially well positioned. A qualified small business can apply a portion of its R&D credit against payroll taxes, which means even a company with no income tax liability yet can turn research spending into real cash savings.
Who should pay attention now
- Companies approaching profitability, where the choice of method changes when deductions land
- Companies preparing for a liquidity event such as an acquisition or IPO, where buyers and investors scrutinize tax positions
- Companies already expensing immediately that want to confirm they have filed correctly and are capturing the credit too
This article is general information, not tax advice. R&D rules are detailed and depend on your specific facts. Talk with a qualified professional before making a method change or claiming the credit.
Not sure how the new rules affect you?
Valoria works alongside CPAs and tax attorneys to identify qualifying R&D activities, calculate eligible expenses, and prepare audit-ready documentation. Find out what you qualify for before you pay anything.