The following is a guest article by Michael Thompson, head of Ryan's R&D tax credit practice. The views expressed are solely those of the author.

The One Big Beautiful Bill Act (OBBB) restored immediate expensing for domestic research and development expenditures on July 4, 2025, just three years after mandatory capitalization and amortization took effect in 2022. This move is not merely a return to the old tax regime but a clear expression of legislative intent—to encourage businesses of all sizes to make incremental R&D investments within the United States, thereby ensuring the nation maintains its technological leadership amid continued global economic expansion.

More importantly, the swift restoration of this incentive has injected new vitality into the discussion about "what constitutes R&D" sparked by the original amendment to Section 174 of the Internal Revenue Code. It promises to further bridge a critical gap in corporate understanding: R&D qualification extends far beyond lab coats and patents. To accurately grasp the tax implications for businesses, we must first clarify the specific impact of OBBB on R&D expenditures.

More Than One "Big and Beautiful" Opportunity

Section 174A restores immediate expensing for domestic research activities, applicable to tax years beginning after December 31, 2024, while foreign R&D expenditures remain subject to a 15-year amortization. This re-establishes a highly attractive tax incentive for U.S.-based research activities.

Additionally, all businesses may elect to accelerate the deduction of unamortized domestic R&D costs from 2022 through 2024, either as a single deduction in the first tax year after December 31, 2024, or proportionally over the subsequent two years. This flexibility allows companies to optimize the timing of deductions based on their specific tax situations.

For small businesses with average annual gross receipts of less than $31 million over the preceding three tax periods, OBBB provides special retroactive relief. These companies may elect, through amended returns, to recover unamortized R&D costs from tax years after December 31, 2021, but must do so within a relatively short timeframe.

With OBBB's adjustment to domestic R&D expensing, businesses should carefully examine the various options available and consider their impact on net operating losses, tax credit utilization, and potential carryforwards. Although Section 174A restores immediate expensing as the default treatment, companies retain the flexibility to elect capitalization and amortization over 60 months or 10 years if that better aligns with their tax planning strategies.

The Hidden Reality of Qualification and Tax Credit Eligibility

Having worked in R&D tax consulting for over two decades, I have found a misconception that pervades nearly every initial conversation. When business leaders hear "R&D," they immediately envision lab coats, test tubes, patents, and AI humanoid robots. While activities containing these elements often indicate tax-related R&D, the 2022 Section 174 mandatory capitalization and amortization change should teach us that these are merely the tip of the iceberg in evidence supporting the existence of R&D activities.

For the past 44 years, the credit for "increasing research activities" under Section 41 of the Internal Revenue Code has provided a direct dollar-for-dollar tax offset for certain types of expenditures—precisely the types that the 2022 law change required to be capitalized and amortized.

Qualifying R&D tax credit activities include systematic efforts to develop products, processes, formulas, technologies, software, or inventions that are new to the company or represent improvements over prior methods. Crucially, businesses need not survey the global competitive landscape to determine uniqueness or novelty—the standard focuses on internal innovation and improvement efforts.

Furthermore, if businesses can demonstrate that they employed processes evaluating alternative approaches or designs during development to overcome inherent technical challenges, the resulting wages, supply costs, contractor payments, and cloud computing expenses are likely to qualify for the credit.

Software Development: A Universal Gateway

For example, Section 174A explicitly treats any amount paid or incurred in software development as research and experimental expenditures. This is particularly significant because, in today's digital environment, nearly all modern businesses operate like software companies—especially given that qualifying software activities typically include internal-use software development, back-office system improvements, creation or enhancement of warehouse management software, development of customer-facing applications, database enhancements, and the design of process automation tools and business intelligence systems.

Even website-related development may qualify—for instance, if it enhances inventory management or customer relationship systems, or involves addressing technical problems through structured methodologies. It is easy to see how these development activities may also qualify for tax credits, providing not only additional deductions to reduce taxable income but also a head start in identifying credits that directly offset taxes owed.

Beyond traditional software development, AI development and implementation also create significant R&D opportunities, as businesses design solutions to enhance or improve the efficiency, reliability, or functionality of existing systems. As AI capabilities advance, activities that once required time-consuming manual input may be completed in a fraction of the time. This raises an interesting question: as AI-driven R&D becomes a more viable alternative to human-driven methods, how will tax credit eligibility evolve? For now, however, strategic timing favors businesses that can maximize current R&D benefits while developing AI capabilities that require substantial human involvement.

Industries to Watch

Software companies are not the only ones that should leverage knowledge of the capitalization and amortization changes brought by OBBB. Manufacturers improving products or related production processes, food development and packaging companies, retail businesses optimizing warehouse logistics equipment, and design-build and value-added construction and engineering firms should all reassess their everyday achievements to determine whether they constitute potentially qualifying R&D activities.

The combination of restored immediate expensing and retroactive relief for small businesses in OBBB is an exciting and long-overdue change in tax law. But businesses should not stop there—they should leverage the past three years of insight into the breadth of R&D as defined by tax law to claim credits for activities that once caused confusion.