To break down what this means for innovators and business leaders, we sat down with Deb Pallasch, who directs KLR’s Research & Development Department and brings over 30 years of experience helping companies capture the full value of their R&D activities. In this Q&A, Deb explains how the OBBBA impacts R&D tax credits, why the timing of deductions matters, and how companies can position themselves to take full advantage of these opportunities.

Q: At a high level, how has the OBBBA changed the landscape for R&D tax credits?

Deb: The changes have been incredibly positive. Businesses can once again immediately deduct their domestic research and experimental (R&E) expenses, rather than capitalizing and amortizing them over time. That immediate deduction has a significant positive impact on cash flow whereby businesses are now able to divert that cash back to the company rather than taxes.

Q: How does this differ from what we saw under the TCJA?

Deb: The Tax Cuts and Jobs Act (TCJA) forced all businesses to capitalize and amortize their U.S.-based R&E costs over five years, which substantially reduced cash flow. Instead of lowering taxable income right away, companies had to spread deductions out, which increased the tax liability in the short term. OBBBA restores immediate expensing for U.S. R&E, which means an immediate reduction in taxable income.

Q: Does OBBBA change how international R&D is treated?

Deb: No. The change applies only to U.S.-based R&E expenses. International R&D still needs to be amortized. Congress made this choice intentionally to incentivize companies to conduct their R&D here in the U.S.

Q: Are there specific types of companies that benefit most?

Deb: It’s really across the board, almost every company conducts some form of research. Small businesses that haven’t yet filed their 2024 returns can take advantage of the change right away, while larger businesses will fully benefit beginning with 2025 filings. In the end, it’s positive for everyone, it’s just a matter of timing.

Q: How does this impact cash flow and tax planning strategies?

Deb: Beyond the potential immediate deduction, there’s also a “catch-up” deduction. Since TCJA required companies to capitalize expenses starting in 2022, businesses can now immediately deduct those previously capitalized costs in 2025 and/or 2026 or amend 2022 and 2023 small business returns to recoup previous amounts paid. This frees up significant cash flow that can be reinvested, ideally back into R&D.

Q: Are there areas of uncertainty businesses should watch for?

Deb: The IRS issued recent guidance on how exactly the change should be presented on tax returns, but questions remain. We don’t expect it to affect the deduction itself, but it could affect how tax preparers report it, for example, whether it’s treated as a change in accounting method requiring a specific form or whether a footnote electing the change will suffice.

Q: What’s your number one piece of advice for business owners navigating the R&D Tax Credit?

Deb: Now is the time to revisit your R&D activities and plan for future product and process improvements. Many businesses let R&D take a back seat due to the capitalization rules, but with that penalty gone, it’s worth taking a fresh look. Congress always intended the credit to promote innovation and with the OBBBA reforms the R&D credit remains one of the few true dollar-for-dollar credits available, and it can be extremely valuable. Plus, startups can apply it against their payroll tax liability, which is a huge benefit when cash is tight. My advice to all companies, don’t leave savings on the table.

Wondering what other tax strategies are being reshaped by OBBBA? Our Inside OBBBA series continues with Brad Lombardi, who will provide insights on OBBBA’s impact on international tax strategies. Stay tuned as we continue to break down the provisions that matter most to businesses and their leaders.

Don’t forget to check out our comprehensive summaries of OBBBA’s impact on individuals and businesses.

Check out our other Inside OBBBA interviews here: 

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