Understanding R&D Tax Credit Changes in the One Big Beautiful Bill Act

Innovation is never cheap. For companies pushing the boundaries of product development, research and development (R&D) spending has long been a balance of necessity and financial challenge. But a piece of that equation may be changing. 

Signed into law on July 4, 2025, the One Big Beautiful Bill Act (OBBBA) introduces the most significant expansion of R&D tax incentives in decades. If you’re part of a product-focused organization—especially a small or mid-sized manufacturer or startup—this is the kind of legislation that can free up the cash you need to boost your innovation ROI.  

Here’s what your engineering team needs to know. 

*Disclaimer: Any bill or tax change like this takes a while to completely unfold. Once the government has signed the bill, the IRS needs to figure out how to apply it. They are working on this now. Therefore, any items in this article are subject to change as the IRS rolls them out. We are not tax advisors; please contact your tax advisor for solutions tailored to your business. 

The Big Change: Immediate Expensing and R&D Tax Credits

For the last few years, businesses had to amortize their R&D costs over five years, making innovation more expensive upfront and complicating cash flow. Under the new law, effective for tax years starting in 2025, that burden is gone.  

Now, companies can deduct 100% of domestic R&D expenses the year they’re incurred and simultaneously claim dollar-for-dollar R&D tax credits on qualified activities. 

Put simply, you get to write off the full cost and claim additional credits, representing a combined tax benefit of 15-25% on qualified R&D spending.  

Example scenario: Your team invests $500,000 into developing a new product. Under OBBBA, that could translate to a $105,000 tax deduction (assuming a 21$ corporate tax rate) plus another $50,000 in tax credits. That’s $155,000 in tax savings upfront, NOT stretched out over five years. 

Plus, Retroactive Refunds for Small & Mid-sized Businesses

The bill also includes a provision for certain small businesses—those with less than $31 million in average gross receipts over the prior three years—to retroactively apply immediate expensing to tax years beginning after December 31, 2021. This means eligible businesses may amend their 2022-2024 tax returns to recover previously amortized R&D expenses.  

If you qualify, this presents an opportunity to improve near-term cash flow through tax refunds, without changing current spending levels. 

Also, Payroll Tax Offsets for Startups

Startups with under $5 million in gross receipts and fewer than five years of revenue can now apply up to $500,000 of R&D credits annually to offset payroll taxes, not just income taxes. 

These credits can now offset both the Social Security and Medicare portion of the employer’s payroll taxes, providing tangible cash relief for companies still in the pre-revenue or growth phases. 

What Qualifies for OBBBA Tax Credits?

R&D tax credits aren’t limited to formal research labs or highly specialized scientific teams. Many engineering and product development activities meet the Internal Revenue Service’s four-part test for qualified research:  

• Permitted Purpose: Aimed at developing or improving a product, process, software, or technique 
• Technological in Nature: Relies on engineering, physical sciences, or computer science 
• Elimination of Uncertainty: Seeks to resolve technical unknowns related to design or feasibility 
• Process of Experimentation: Involves testing, modeling, prototyping, or iterative development 

Some examples of qualifying projects across engineering disciplines might include:  

• Designing and evaluating prototypes 
• Developing new automation or process control systems 
• Reducing waste or improving process efficiency 
• Custom software development for internal operations or system integration 
• Meeting new performance, safety, or regulatory standards 

What Costs Are Covered?

The R&D tax credit covers four categories of expenses:  

Wages	For employees directly performing, supervising, or supporting qualified R&D work
Supplies	Tangible materials used during development and testing (excluding capital equipment)
Contract Research	65% of costs paid to third-party vendors performing eligible work
Cloud Computing	Costs associated with cloud services used in the course of R&D

Just make sure you have the proper documentation to support claims, such as time tracking, project records, and testing documentation. 

Who Is Covered?

The scope of qualifying work is often broader than expected. Personnel whose work may support an R&D credit claim include:  

• Design, process, manufacturing, and software engineers 
• Test engineers and quality assurance specialists 
• CNC operators, drafters, and CAD technicians 
• Production staff contributing to process optimization or troubleshooting 

How to Claim Your Credits: 4 Action Steps

Whether your organization has claimed the R&D credit in the past or not, the recent updates warrant a fresh look once it’s ready to go with the IRS. Here are four places to start.  

1. Assess Eligibility

Many companies underestimate the scope of qualifying activities. Make sure you don’t miss out by reviewing past and current projects with the four-part test in mind. 

2. Document Rigorously

The IRS has increased its expectations around documentation, particularly with changes to Form 6765 for 2025. This makes time tracking and project records even more important. 

3. Engage Tax Professionals

Working with specialists who understand both tax law and engineering workflows can help ensure compliance and maximize benefits. 

4. Evaluate Past Returns

If you meet the criteria for small businesses, review the potential to amend returns from 2022–2024 and recover previously amortized expenses. 

Take Advantage of a New Incentive Landscape

If your innovation efforts have slowed due to budget constraints or uncertainty, now be by the time to restart. The changes introduced under the One Big Beautiful Bill have revived financial incentives that reduce the cost of developing new products, processes, and technologies.  

If you’re unsure where to begin, our team is here to help. We work alongside engineering teams to spot opportunities, drive innovation, and make big ideas come to life. Reach out to get a project started.