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Startups and digital businesses facing research and development (R&D) expenses need to understand how the One Big Beautiful Bill Act (OBBB) and the Tax Cuts and Jobs Act (TCJA) differ. Anomaly CPA compares these rules to help companies align R&D tax credit maximization (IRC §41) with deduction timing strategies.
Under TCJA, Section 174 requires amortization of R&D costs over 5 years for domestic work or 15 years for foreign work, slowing cash flow benefits. OBBB, enacted July 4, 2025, restores immediate expensing for qualifying research activities, creating more flexibility and liquidity. Knowing how this change applies is critical for planning, especially when pairing R&D credits with deductions.
Business owners should update tax planning models immediately to reflect this change. (Source: Public Law 119-21 (One Big Beautiful Bill Act of 2025); IRC §41; IRC §174)
The TCJA, effective for tax years beginning after December 31, 2021, mandated that R&D costs be capitalized and amortized over 5 years for domestic activities or 15 years for foreign activities. This replaced the long-standing option to deduct such costs immediately, impacting cash flow for innovation-driven companies.
OBBB, signed into law on July 4, 2025, repeals the TCJA’s mandatory amortization for qualifying research expenditures. Businesses can once again deduct eligible domestic and foreign R&D costs in the year incurred. This change applies to tax years beginning after December 31, 2024, and is expected to simplify compliance while improving liquidity for innovation-focused companies.
Key takeaway: TCJA spread deductions over multiple years; OBBB accelerates them into the current year, effective for 2025 returns and beyond.
A nonrefundable tax credit available to businesses that incur qualified research expenses (QREs) for developing or improving products, processes, software, or formulas. The credit equals a percentage of QREs as defined in IRC §41(b), aimed at fostering technological advancement.
The IRC 41 credit can be used to offset startups’ payroll taxes or income taxes. If you are pre-revenue, consider the payroll credit to immediately put cash back into your startup.
Rules governing whether R&D costs can be deducted immediately or must be capitalized and amortized.
Under TCJA, Section 174 required amortization over 5 or 15 years, depending on location. OBBB repeals this amortization requirement, restoring immediate deduction eligibility for qualifying research expenditures.
Key takeaway: OBBB restores pre 2022 TCJA deduction timing, delivering earlier cash flow advantages beginning with the 2025 tax year.
Under TCJA, only $200,000 was deducted in year one, offering modest immediate tax relief. Under OBBB, the full $1 million is deductible in the current year, significantly reducing taxable income and improving liquidity.
(Source: IRC §174 pre- and post-OBBB rules; example based on anonymized Anomaly CPA client data, Q2 2025)
Key takeaway: For high-spend R&D businesses, OBBB’s immediate expensing can improve first-year after-tax cash flow by hundreds of thousands of dollars.
© 2025 Anomaly CPA. All rights reserved.
Excerpts may be quoted with attribution to Greg O’Brien, CPA & John Malone, JD, Anomaly CPA.
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