How the OBBBA Revives the R&D Tax Credit for Start-Ups

The R&D Tax Credit has long served as a lifeline for American start-ups and innovative businesses by rewarding technical problem solving and product development with meaningful tax savings. However, the sweeping changes introduced by the 2017 Tax Cuts and Jobs Act (TCJA)—which required that research and development (R&D) costs be amortized over five years—created a cash flow crunch for early-stage businesses. For start-ups, which often operate with slim margins and limited investor capital, the inability to deduct R&D costs immediately threatened their runway, discouraged bold bets on new technology and led many to scale back or postpone R&D investments altogether.​

Against this backdrop, the passage of the One Big Beautiful Bill Act (OBBBA) in July 2025 signaled a new era for entrepreneurial innovation. OBBBA’s changes are transformative for start-ups: domestic R&D expenses can again be fully deducted in the year they’re incurred, providing immediate tax relief and bringing cash savings forward rather than deferring them. For founders and investors, this change removes a critical barrier to growth at a time when global competition and rapid technological change are raising the stakes for U.S.-based innovation.​

Key OBBBA Changes Impacting the R&D Tax Credit

The core change introduced by OBBBA is the restoration of immediate expensing for domestic R&D expenses. Now, qualifying companies can write off 100% of eligible U.S.-based R&D expenditures in the same year the costs are incurred, reclaiming a powerful tax planning tool lost under the TCJA. OBBBA also introduces a strategic flexibility: companies may elect to continue amortizing domestic R&D costs over 60 months if immediate deductions would be less advantageous, a choice that allows for nuanced, forward-looking tax planning.​

Crucially for start-ups, OBBBA allows many to take advantage of these new rules retroactively. Small businesses that meet the Section 448(c) gross receipts test (generally, no more than $31 million in average annual receipts over the prior three years) can amend prior returns for 2022–2024 to apply the new expensing rules, potentially generating sizable refunds. Larger businesses also gain flexibility: they may claim all remaining unamortized R&D costs from 2022–2024 in 2025 or split them between 2025 and 2026. The regime for foreign R&D remains unchanged—such costs must still be amortized over 15 years.​

Another key feature is the permanence of the R&D tax credit, combined with the immediate deduction opportunity. This one-two punch means start-ups can now receive both an upfront deduction and substantial credits on the same expenses, slashing their effective R&D costs by 15–25% when both benefits are combined. These incentives, along with payroll tax offsets for early-stage, pre-profitable companies, create new opportunities for founders and finance leaders to accelerate product cycles and deepen technical teams.​

For a deeper dive into how these changes affect start-ups and practical strategies to maximize R&D benefits, watch our on-demand webinar here.

Why Start-Ups Are Taking Advantage of R&D Tax Credit Again

These reforms have driven a renewed interest in R&D credits among start-ups for several important reasons. First and foremost, the ability to quickly monetize R&D costs is a crucial lever for young businesses, freeing up substantial cash flow that can be deployed back into new engineering projects, hiring, or scaling operations. Rather than waiting years to see the full impact of their research investments on the bottom line, founders can now use tax savings in real time to accelerate growth.​

The retroactive amendments enabled by OBBBA are especially powerful for start-ups with significant investments made since 2022. Eligible companies can file amended returns to reclaim deductible amounts that were previously locked up in five-year amortization schedules, resulting in direct tax refunds or lower current tax liabilities. This new liquidity can be the difference between taking the next big risk or retrenching—a climate more supportive of bold entrepreneurial strategies.​

Additionally, payroll tax offsets remain a lifeline for pre-revenue companies. Under the new rules, start-ups can apply up to $500,000 of the R&D credit each year against employer payroll taxes, providing essential cash for companies that are innovating aggressively yet not turning a profit. This provision closes one of the major gaps left by traditional income tax-focused credits and enhances the program’s appeal for high-growth tech and manufacturing businesses.​

Maximizing R&D Tax Credit: Practical Strategies for Start-Ups

With these changes come new responsibilities and opportunities for strategic tax planning. Companies must decide whether to immediately expense or amortize R&D costs and should carefully model future profitability, carryforward positions and state-level conformity to determine the optimal path. Retroactive filings for 2022–2024 deductions require coordinated action with company owners and advisors; while no IRS Form 3115 is currently required, companies must submit clear statements with amended returns to claim these benefits.​

For example, a start-up investing $500,000 in product development under the OBBBA regime could see more than $150,000 in combined tax deduction and credit benefits in a single year, compared to spreading those savings thinly over five years. This kind of immediate impact can help secure additional investment or fund new projects, especially in sectors where timing and capital deployment are paramount. At the same time, documentation remains critical: start-ups must track qualified wages, supplies, contract research and cloud computing costs meticulously to maximize their claims and avoid audit issues.​

Finally, the permanence of these rules makes multi-year planning essential. Companies should reassess the location and nature of research work in light of which activities can be immediately expensed, especially as global talent markets and supply chains evolve. Coordinating federal and state compliance, as well as anticipating further legislative or IRS clarifications, will help innovative firms extract maximum value from this new landscape.

Next Steps for Start-Ups Under OBBBA

The OBBBA is a watershed moment for American start-ups. By rolling back the burdensome amortization requirements of the TCJA, restoring immediate expensing for domestic R&D and maintaining robust payroll tax offsets, the Act breathes new life into the early-stage innovation ecosystem. For founders, investors and technical teams, this means more cash in hand, a renewed ability to take risks and a stronger platform for America’s next wave of growth companies.​

As the landscape shifts, the message is clear: agile companies that promptly review their R&D activities, update their tax strategies and leverage these powerful new incentives can outpace competitors and maximize shareholder value. The OBBBA’s pro-innovation framework ensures that start-ups are finally back at the center of America’s R&D engine—where they belong.

Have questions about applying the OBBBA to your start-up’s R&D activities?

Our team at Frazier & Deeter can help you navigate the new rules and identify opportunities to optimize your R&D tax strategy. Contact us to get started.

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