“One Big Beautiful Bill” Encourages Small Business Innovation: How Entrepreneurs Can Immediately Benefit from Restored R&D Expensing

By SBE Council at 4 August, 2025, 3:56 pm

By Barbara Weltman –

You don’t have to be in the pharmaceutical industry or develop software to engage in research and development (R&D) activities that can produce new things for sale or create new processes for your internal business operations. If you spend money on R&D, you can recoup some of your costs through federal tax breaks. There’s a tax credit for R&D activities. There’s also an immediate tax deduction, thanks to the “One Big Beautiful Bill Act” (OBBBA), which made important changes for both the credit and the deduction. There’s even exclusive support for small businesses that utilized immediate R&D expensing in the past and experienced a financial hit when the benefit expired.

Here’s how these write-offs work – and interact – and how your small business can benefit from them.

Research Credit

You can take a tax credit for qualified research expenditures (QREs), and the rules for the credit have not been changed by OBBBA. QREs include wages paid to researchers, supplies used in R&D, and 65% of cost to outside contract research. The credit is 20% of QREs in the current year minus a base amount (a complicated formula that is a historical ratio of research spending to gross receipts). Alternatively, there’s a 14% simplified credit that doesn’t require gross receipts data, and is the credit more commonly used by small businesses.

Usually, the credit is a dollar-for-dollar reduction of income tax liability. For owners of pass-through entities, their share of the credit passes through to them and is used on their personal income tax returns. Small businesses have two special ways in which to use the credit:

Offset to employment taxes

Small businesses can offset the employer share of FICA (up to $250,000 per year for the Social Security tax and up to $250,000 per year for the Medicare tax) if the businesses have less than $5 million in gross receipts in the current year and NO gross income for any year during the previous five-year period.

Offset to AMT

Owners can use their share of the research credit to offset their personal alternative minimum tax (AMT) liability. They qualify for this option if the business has average annual gross receipts in the three prior years of $50 million or less. Again, for manufacturing businesses, the dollar limit is $80 million

Expensing for R&D

Businesses can elect to capitalize R&D expenses and then deduct them. Before 2022, such costs could be fully deducted (expensed) in the current year, but after 2021 they had to be amortized (deducted ratably) over a period of not less than 60 months (longer for foreign entities). OBBBA restores expensing for 2025 and creates a new Section 174A to address the changes. But as the infomercial says…“but wait, there’s more.”

Retroactive Relief for Small Businesses

Small businesses can benefit now from research activities they conducted in 2022 through 2024. If they have domestic R&D expenses and average annual gross receipts in the three prior years not exceeding $31 million, they can go back and expense their R&D costs in lieu of amortizing them.

This means they get a tax refund by accelerating their deduction for R&D costs. This is a great way to increase cash flow, which can be plowed back into R&D or used for other purposes.

Note: The IRS needs to provide guidance on how this can be done in the most expeditious way. This guidance is particularly desired for small businesses on extension to file their 2024 returns so they know how to handle 2024 R&D costs on these returns as well as to obtain a refund for costs in 2022 and 2023.  A coalition of small business groups – including SBE Council – is urging the IRS to quickly provide guidance on the issue. In a July 31 letter to IRS Commissioner Billy Long and Assistant Secretary for Tax Policy Kenneth Kies, they note:

“This provision represents an immediate and significant cash stimulus for those businesses that qualify for this R&D tax incentive, and positively impacts the entirety of our constituencies. To ensure small businesses can fully benefit from this provision in a timely and cost-effective manner…we respectfully urge the IRS to issue prompt guidance on how to claim this R&D tax benefit retroactively, as Congress intended. Specifically, we seek clarification on whether small businesses that filed for an extension on their 2024 taxes may deduct their eligible expenses immediately without being required to first file and then amend their return.”

Again, this represents a significant benefit for small businesses that took a hit when immediate R&D expensing was not fully restored. According to an SBE Council survey on the issue (June 2023), 29% of small businesses surveyed took advantage of immediate R&D expensing and 35% reported they would have to borrow money to pay higher tax bills when immediate expensing expired. Similar numbers reported other negative effects such as reducing employment and the amount of profit sharing for existing employees, along with less capital available to be plowed back into innovation and growth. Not surprisingly, 86% of small business owners supported the effort to make immediate R&D expensing permanent.

Transition Rule

Instead of looking back, small businesses can choose to deduct any remaining amortization in full in 2025 or spread out over 2025 and 2026. This is an election that must be made on timely filed return. This rule applies to businesses of any size.

Credit or Deduction?

You can use both, but you essentially can’t double dip on the same costs. You can take full benefit of the tax credit and reduce the deduction by the portion of expenses allocable to the credit. Alternatively, you can take a reduced research credit without any reduction in the deduction (a choice that simplifies things for small businesses). A tax professional can help to determine which option to use.

Conclusion

Going forward, the ability to expense R&D costs simplifies tax decisions and chores for small businesses. The policy goal is to encourage greater investment that will leads to more innovation across industry sectors. In the meantime, small businesses with research activities should work with a tax professional who can advise on the optimum way to write-off expenses and reduce the tax bill for companies and owners of pass-through entities.

Barbara Weltman is a member of SBE Council’s advisory board, and has been a leading consultant for small businesses of every kind for over twenty years. She’s the founder of Big Ideas for Small Business® and has written numerous books on small business operations, including J.K. Lasser’s Small Business Taxes, Smooth Failing, and Home Business Magazine’s Home-Based Business Guide. Follow Barbara on Twitter @BigIdeas4SB.