If your business has Research & Experimental (R&E) Expenses, recent tax law changes may affect how you deduct those costs and whether you can claim relief for prior tax years. The One Big Beautiful Bill Act (OBBBA) changed the tax treatment of certain domestic and foreign R&E Expenses.
Prior to OBBBA, Qualified R&E Expenses could not be deducted in the year they were incurred. These expenses had to be capitalized and depreciated as five year property.
If you had $200K of R&E Expenses in a year, the largest deduction you could receive in that year was $40K. This caused a severe hardship for many entrepreneurs by creating a taxable event.
The OBBBA allows you to deduct all of those expenses when they were incurred. It also allows you to amend prior year returns to fully expense R&E to prior tax years beginning after December 31, 2021, and before January 1, 2025.
For many taxpayers, the deadline to make this retroactive election is July 6, 2026. However, some taxpayers may have an earlier deadline because the normal refund claim deadline still applies
Depending on your situation, you may also need to submit statements, amended forms, or make adjustments to research credits previously claimed. You may qualify if your business…
1 – Is not a tax shelter, and
2 – Meets the gross receipts requirements. For tax years beginning after December 31, 2024, the gross receipts test generally looks at average annual gross receipts for the previous three tax years.
The inflation-adjusted limit for 2025 was $31 million.
Let me leave you with this…
The R&E Expense should not be confused with the Research & Development (R&D) Credit. This provides a dollar for dollar credit against income tax on the federal return.
If your business qualifies for the credit, we can go back as many as three years to amend returns and claim the credit. And if the entire credit is not fully used in those years, it can be carried forward for up to twenty years to reduce or eliminate future income taxes.
There are two basic R&D Credits.
The first is for small business start-ups to cover the employer side of payroll taxes. This credit limits out at $500K annually and can be taken for up to 5 years.
The second more common credit is a dollar for dollar credit that reduces income tax. It is taken on qualified R&D Expenses. There is no upper limit on this credit.
The qualifications for the credit are as follows…
1 – The activity must improve the functionality, quality, or reliability of a business component.
2 – The process must be technological, based on a hard science such as engineering, physics, and chemistry or the life, biological, and computer sciences.
3 – At the beginning of the process, there must have been uncertainty about its creation or implementation.
4 – There must have been a process of experimenting with multiple design alternatives or a trial and error approach.
Successfully completing these credits is no small feat. This isn’t as simple as filling out one of the usual IRS Forms.
It should be noted that the R&E Expense and the R&D Credit are not mutually exclusive events. Both can be claimed in any given year.
If you have questions regarding the R&E Expense changes or the R&D Credit, we’d love to talk.
And as always, if you’re having problems with your accounting and tax work, please contact us today.
We’re all going to get through this. Let’s get through it together…
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.AccountingSolutionsLtd.com
www.SalarySolutions.net
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