What CFOs Need to Know About R&D Tax Credit Reform

The recently enacted federal tax legislation — the One Big Beautiful Bill Act — introduces significant changes to the treatment of research and development expenditures. After years of uncertainty created by the 2017 Tax Cuts and Jobs Act, finance leaders finally have clarity and, in many cases, the opportunity for significant relief.

The law restores immediate expensing for domestic R&D costs, creates flexibility for handling unamortized balances and provides retroactive relief for small businesses. Taken together, the changes offer not just compliance simplicity but also new levers for cash flow management, tax strategy and long-term planning.

Immediate expensing restored

For tax years beginning after Dec. 31, 2024, companies may once again fully expense domestic R&D costs in the year incurred.

This reverses the TCJA’s requirement that businesses spread deductions over five years for domestic R&D and 15 years for foreign R&D. That mismatch between outlays and deductions created a drag on liquidity, particularly in industries with heavy upfront research investment.

By restoring current-year expensing, the new law realigns tax treatment with the reality of how innovation is funded. Business owners and finance teams can expect improved cash flow timing, less reliance on external financing, and more flexibility to reinvest in growth. For organizations balancing high labor costs, capital expenditures and digital transformation initiatives, the change may meaningfully shift capital allocation decisions.

New options for unamortized balances

For companies that have already accumulated unamortized domestic R&D costs under the old rules, the law provides a choice beginning in 2025:

• Deduct the entire remaining balance in 2025, or
• Spread the deductions evenly across 2025 and 2026.

The decision is not merely an accounting exercise. For businesses, it requires careful tax forecasting and scenario modeling.

• Companies projecting unusually strong taxable income in 2025 may benefit from a one-time deduction.
• Businesses that value smoother earnings management may prefer spreading deductions.
• Multinational entities should also consider the interplay with foreign tax credit limitations, transfer pricing and global minimum tax rules.

This flexibility allows finance leaders to align R&D tax treatment with broader business objectives, whether that means minimizing volatility, reducing effective tax rates or strengthening balance sheet optics.

Retroactive relief for small businesses

Perhaps the most intriguing aspect of the changes is retroactive relief for businesses meeting the “small business gross receipts test,” defined as average annual receipts of $31 million or less in the three years prior to 2025.

These businesses can amend returns for 2022, 2023 and 2024 to immediately deduct R&D costs that had previously been amortized. Effectively, the TCJA’s five-year rule disappears for them.

Read the full article on CFO.com.