How Trump's tax bill changes your R&E tax strategy for 2025 and beyond

For the past three years, companies faced an unusual problem: owing taxes on research spending that hadn't yet generated a dollar of revenue. A Series A tech startup burning through cash as it looked for product-market fit could end up with a surprise tax bill — despite not bringing in any money.

A recent change to how businesses deduct research and experimental (R&E) expenses put an end to that paradox. But now finance leaders face a new question: what should they do about the past three years?

First, a quick recap of the changes:

• Before 2022, companies could either deduct any R&E expenses immediately or spread them over five years.
• The 2017 Tax Cuts and Jobs Act (TCJA) changed that rule when it took effect in 2022. Companies had to spread domestic expenses over five years and international expenses over 15 years.
• President Trump’s One Big Beautiful Bill Act (OBBBA) reversed part of these rules, allowing businesses to immediately expense domestic R&E expenses incurred after 2024. Costs incurred abroad must still be spread over 15 years.

R&E covers a broad range of expenses — “basically, any costs that are incurred to eliminate doubt,” Sakats says.

For businesses that spend heavily on innovation, this shift can have a meaningful impact on cash flow and affect decisions about where research activities happen.

“The law is trying to make sure that companies are highly incentivized to hire U.S. employees, use U.S. resources,” says Mark Sakats, senior tax manager at accounting and tax firm GRF CPAs & Advisors.

What it means for you

The revisions to Section 174 can have a major impact on tax liabilities for organizations with substantial R&E spend. Here’s how it could affect a few select industries:

• Technology and SaaS. These companies often have large payroll, infrastructure, and software development costs, so the change better aligns their R&E spend with tax benefits. One caution: those with overseas development hubs will have to amortize that portion of R&D costs.
• Manufacturing and engineering: Being able to immediately recover the costs for prototyping, pilot builds, and process engineering could revive paused capital projects. However, pay close attention to the line between capital expenditures (e.g. machinery) and experimental work and keep clear and up-to-date documentation.
• Life sciences, biotech, and pharma: This shift removes a major hurdle for the multi-year R&D processes that is standard in these sectors. If part of that is outsourced abroad (e.g., lab partners), recognize the effect of the foreign amortization rule. Also, understand the complications posed by clinical trials that cross tax years.

The change may impact a variety of businesses outside of these industries because R&E covers a broad range of expenses — “basically, any costs that are incurred to eliminate doubt,” Sakats says. This could be the money a consulting giant spends to develop proprietary processes for client projects, for example.

"This is not shoehorned into certain companies that you think about that are being very innovative with new technologies or coming out with new, unheard of products,” Sakats says.

3 ways to handle 2022–2024 R&E costs

Finance leaders now have three options to address the years where they did capitalize and amortize R&E expenses. The first only applies to what the IRS considers “small businesses”: for 2025, that’s those with less than $31 million in average annual gross receipts over the past three years.

1. Amend past returns: Small businesses can amend their returns from 2022 to 2024 to immediately deduct R&E costs. Those changes could result in sizable refund checks from the IRS.
2. Expense everything in 2025: All businesses can deduct unamortized R&E costs from the past three years in 2025. This could lower or eliminate your taxable income for this year, which may be especially advantageous if it’s shaping up to be a big year.
3. Spread expenses across 2025 and 2026: The other choice, also open to all businesses, is to deduct those unamortized expenses over 2025 and 2026. If you expect major growth and a bigger tax bill in 2026, this could help offset it.

"It's helpful to model out the different scenarios and options. What's good for one business is not necessarily good for the next."
Mark Sakats, GRF CPAs & Advisors

So how do finance executives determine the best path for their business? Break down the impact on tax liabilities for each option. Then build detailed forecasts for 2025 and 2026 to compare deducting all expenses this year versus spreading them over two years (or amending returns, if eligible).

“It's helpful to model out the different scenarios and options,” Sakats says. “ … A lot of this is just based on the facts and circumstances for each individual business and each individual taxpayer. What's good for one is not necessarily good for the next."

One more consideration for small businesses: your tax preparer will charge to amend returns. If employees are spread across dozens of tax jurisdictions, this cost could eat into the refund you’re due, Sakats notes. He recommends using the service provider that originally filed your returns to minimize cost and complexity.

What’s next

Businesses that elect to amend returns for 2022 have until three years from when they initially filed returns or July 4, 2026, whichever is earlier.

The back and forth on R&E treatment over the past several years may leave you wondering if the rules could change again soon. The short answer: that’s not likely. These changes were enacted permanently, and lawmakers on both sides view immediate expensing as key to American innovation, Sakats notes.

Final thoughts

Restoring immediate deductions for domestic R&E expenditures is a win for many businesses. Now is the time to revisit your R&E strategy and ensure your finance team models each scenario while there’s still time to evaluate options.