As the old saying goes, be careful what you wish for.
Companies in the tech sphere were grateful that last year’s One Big Beautiful Bill Act permanently restored immediate expensing for research and development costs, after it had been rescinded in 2022 to help pay for the rate cuts in the Tax Cuts and Jobs Act.
But they were also pleasantly surprised that the new law gave companies some ability to accelerate recognition of the expenses for that three-year period in between 2022 and 2025. For small businesses with $31 million or less in annual gross receipts, the OBBBA allows them to fully utilize 2022-2024 R&D costs as if expensing had never been rescinded–and even to receive interest on tax payments that are no longer needed.
That’s a lot more flexibility than companies would have in a normal year. But with those options comes some tricky decision-making, forcing companies to weigh administrative burdens, expected profits and potential tax benefits.
“I've never seen anything like this in my career,” said Josh Rowley, an Eide Bailly partner and leader of the firm’s Technology Industry Service group.
Especially for software companies or those in related services, R&D costs can represent the bulk of annual expenses, including wages for most of their employees. Waiting for several years to fully include that spending in the calculation of taxable income can raise tax liabilities exponentially.
Some hoped that Congress would act before the 2022 change happened–after all, lawmakers have long supported favorable tax treatment for innovative R&D spending. But while proposals to prevent or reverse the shift gained some political momentum, ultimately the law stayed in place until 2025.
For many companies, the choice for what to do now is a no-brainer. By amending returns for the 2022-2024 period, they can recognize those costs as quickly as possible, with the added bonus of interest. Before the ink on the OBBBA was dry, the IRS was already getting flooded with amended returns.
But for others, the paperwork isn’t worth the windfall, especially depending on the corporate form.
“A lot of clients saw the amendment as a hassle. If that business is a flow-thru with 20 partners, they all have to amend their returns. It's such an administrative headache,” Rowley said. “The option to amend is not one-size-fits-all.”
Another attractive option, available to all companies, is to expense all of the 2022-2024 expenses in 2025, or spread between 2025 and 2026–what some are calling a “super-deduction.”
One final path forward is for companies to continue to amortize 2022-2024 costs on the 5-year schedule mandated by pre-OBBBA law, while immediately expensing R&D spending from 2025 onward. For companies that accumulate large amounts of net operating losses, continuing to amortize might make the most sense.
“There’s a lot of optimization to think about,” Rowley said. “It’s really a stylistic choice for some.”
Companies have until July 6 to decide whether or not to take the “super-deduction.”
