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The One, Big, Beautiful Bill could change how businesses deduct research costs

If your business spends money on research and development, tax changes that went into effect in 2022 may have affected your tax situation. Proposed legislation could modify these rules. Here’s what business owners should know.

What Changed in 2022

Before 2022, businesses could deduct research and development expenses immediately in the year they were incurred. This applied to costs for developing new products, improving processes, or testing new ideas.

Starting in 2022, the Tax Cuts and Jobs Act changed these rules. Research expenses must now be capitalized and amortized over 5 years for domestic activities and 15 years for foreign activities. This means businesses spread the deduction over multiple years instead of taking it immediately.

Impact on Businesses

This change has affected various types of companies, particularly startups, tech firms, and manufacturers. Many have reported increased tax liabilities, including in years when they operated at a loss.

The shift from immediate expensing to amortization has created cash flow challenges for innovation-focused businesses and complicated tax reporting and long-term financial planning.

What “The One, Big, Beautiful Bill” Proposes

The One, Big, Beautiful Bill is a tax and spending package that passed the House of Representatives in May. It includes a provision that would restore immediate deductibility for research and development expenses.

Specifically, the bill would allow businesses to immediately deduct domestic research expenditures for taxable years beginning after December 31, 2024, and before January 1, 2030. This would apply only to domestic activities during this five-year window.

If enacted, this would return the rules to their pre-2022 treatment for the specified period.

Current Legislative Status

The bill’s passage remains uncertain. While it passed the House, it’s now under consideration in the Senate, where lawmakers have indicated they want to modify certain provisions. Any Senate changes would require the bill to return to the House for another vote before it could be signed into law.

The legislative process continues, and the final outcome is not yet determined. At Padgett, we’re staying on top of what future legislations could mean for you to help you make the best decisions.

What This Means for Your Business

If your business incurs research and development expenses, these potential changes could affect your tax planning and cash flow. The difference between immediate deductibility and amortization over multiple years can have significant financial implications.

Business owners should monitor the legislation’s progress, meet with a Padgett advisor, and consider how potential changes might impact their tax strategy.

Questions about how these potential changes might affect your business? Contact your local Padgett advisor for guidance on navigating these tax considerations.

The post The One, Big, Beautiful Bill could change how businesses deduct research costs appeared first on Padgett.