John Malone, JD

Year-End Planning Under OBBB: Leveraging Bonus Depreciation and R&D Credits Together

The One Big Beautiful Bill (OBBB), enacted July 4, 2025, reshaped two of the most valuable business incentives: bonus depreciation and R&D expensing/credits. Taken together, these changes open powerful opportunities for year-end planning. Business owners can now pair immediate 100% bonus depreciation with full expensing of domestic research under new Section 174A while still benefiting from the Section 41 R&D credit. The catch: these provisions interact in ways that require careful modeling.

This post explains:

how bonus depreciation and R&D expensing operate under OBBB,
the interplay between deductions and credits,
traps to avoid in year-end planning,
and strategies to optimize both benefits before December 31, 2025.

Background: Two incentives on different tracks

Before OBBB, bonus depreciation was phasing out (40% for 2025), and all R&E costs had to be amortized over 5 or 15 years. This double hit reduced cash flow and weakened incentives for domestic innovation.

OBBB reversed course by restoring 100% bonus depreciation through 2027 and creating Section 174A for immediate domestic R&E expensing.

Definition Block: Section 280C (R&D Credit Adjustment)

Section 280C requires taxpayers claiming the R&D credit to reduce their deductions by the credit amount unless they elect a reduced credit. This prevents businesses from “double dipping” by taking both a full deduction and full credit on the same costs.

Key takeaway: Both incentives are back in full force, but Section 280C and credit base rules make interaction complex.

Bonus depreciation under OBBB

100% deduction available for qualifying property placed in service between 2025–2027.
Applies to machinery, computers, servers, software, and qualified improvement property.
New phase-out begins in 2028: 80%, then 60%, 40%, 20%, and 0% by 2032.

Key takeaway: Businesses should align equipment purchases with year-end placed-in-service deadlines to capture the deduction.

R&D expensing and credits under OBBB

Domestic R&E may be fully expensed under §174A.
Foreign R&E must be amortized over 15 years.
The Section 41 credit remains, but expensed costs reduce the credit base.
Taxpayers must weigh whether amortizing some R&E yields a stronger combined result.

Key takeaway: Expensing maximizes immediate deductions, while amortization may preserve more credit base.

The interaction: deductions vs. credits

Expensing R&E reduces taxable income immediately, but shrinks the credit base.
Amortizing R&E reduces deductions upfront, but may increase credit amounts.
Bonus depreciation does not affect credit bases, but increases the risk of creating or enlarging a net operating loss (NOL), which is limited to offsetting 80% of taxable income in future years (IRC §172).

Key takeaway: Modeling the combined effect of bonus depreciation, R&E expensing, and credits is essential for optimizing year-end outcomes.

Worked example

Example
A software company spends $1,500,000 on domestic R&E and purchases $2,000,000 of servers in late 2025. It has $5,000,000 of gross income.

With expensing and 100% bonus: R&E deduction = $1,500,000; server deduction = $2,000,000. Taxable income = $1,500,000. R&D credit (assume 8% rate) = $120,000.
With amortization and 100% bonus: R&E deduction = $300,000 (1/5 amortization); server deduction = $2,000,000. Taxable income = $2,700,000. R&D credit base larger; credit = $240,000.

At 21% corporate tax rate, first scenario yields lower taxable income but smaller credit; second scenario yields higher credit but more taxable income.

Assumptions

All R&E qualifies under §174A and §41.
Equipment qualifies for §168(k).
Company has sufficient income to use deductions.

Action steps for year-end 2025

Place qualifying property in service before December 31 to capture 100% bonus depreciation.
Decide whether to expense or amortize domestic R&E costs based on combined credit and deduction modeling.
Evaluate whether creating an NOL improves or worsens future tax positions.
Confirm credit base calculations under §41 and make necessary 280C elections.
Track domestic vs. foreign research costs separately.

Structured summary

OBBB restored 100% bonus depreciation through 2027 and introduced §174A expensing for domestic R&E.
Expensing maximizes deductions but reduces the credit base; amortization preserves more credit but defers deductions.
Bonus depreciation boosts immediate deductions but may create NOLs subject to the 80% limitation.
Year-end planning requires balancing deductions, credits, and long-term tax position.
Businesses should carefully model scenarios before December 31, 2025.

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