The R&D Tax Credit Opportunity You Can't Miss
If you write code, you probably qualify for the R&D tax credit. And if you've been building since 2022, you need to act soon or risk leaving serious money on the table.
I've spent the last few weeks analyzing the One Big Beautiful Bill that was signed into law on July 4th, 2025, and let me tell you—this is a massive recovery opportunity for small businesses.
NEW WEBINAR RECORDING
Evan Baldridge and I cover the critical provisions of the One Big Beautiful Bill affecting small businesses, including the R&D tax credit recovery opportunity, QBI deduction extension, and SALT cap changes—with actionable steps you need to take before the July 4, 2026 deadline.
|
The R&D Tax Story You Need to Know
The R&D tax story has two distinct parts that work together:
- The R&D credit (Section 41) - Introduced in 1981 as part of the Economic Recovery Tax Act, this gives you 8-10% cash back on qualified research expenses.
- The R&D deduction (Section 174) - This has been around since 1954, allowing for 100% immediate write-off of R&D costs.
For 68 years, Section 174 let businesses immediately deduct all their R&D expenses. Life was good. Then the Tax Cuts and Jobs Act (TCJA) in 2017 changed everything, requiring businesses to amortize R&D costs over 5 years starting in 2022. The credit (Section 41) remained untouched, but the deduction (Section 174) was broken.
This one-two punch of having both the credit AND the deduction is what makes R&D investment so powerful from a tax perspective. When TCJA broke the deduction part, it hurt innovative businesses badly.
What Actually Happened
Let me show you what this looked like for real businesses:
A software company in 2022 with:
- $10MM revenue
- $8MM R&D expenses
- $1MM other costs
Pre-TCJA: Would have owed about $210K in tax
Post-TCJA: Actually owed ~$1.7MM in tax
Why? Because they could only deduct 800K of their R&D in year one (10% of the 5-year amortization plus half of the first year due to mid-year convention) instead of the full 8MM.
Many companies had to raise debt just to pay taxes on phantom profits they never actually realized. It was a nightmare.
The One Big Beautiful Bill To The Rescue
The recently enacted OBBB has permanently restored immediate expensing for domestic R&D expenditures. Here's what it means for you:
- 100% immediate deduction RESTORED
- Small businesses can amend 2022-2024 returns
- Large businesses can accelerate amortization
- This is a PERMANENT fix
For small businesses (those with average annual gross receipts of $31 million or less over the last three years), you can now:
- Amend your 2022-2024 returns
- Get full refunds for overpaid taxes
- But you must act by July 4, 2026.o extensions!
Example: $400K revenue consultant assuming a 35% tax bracket.
- S-Corp structure saves: ~$11k/year in employment taxes (cash savings)
- QBI deduction: ~$11k/year tax savings (20% deduction on $162K profit)
- Business expenses: ~$17k/year (on 50k of bonafide expenses)
- Retirement contributions: ~$24k/year tax savings (on $60k Solo 401k)
- Total: ~$60k/year in actual tax savings
This means an extra $600k in tax savings over a decade (before accounting for growth/investment returns and the $600k invested in retirement!)
The Recovery Math
Let's say you spent $3MM on R&D in 2023:
DEDUCTION OPPORTUNITY:
- Previously deducted: $300K (10% of first year)
- Trapped in amortization: $2.7MM
- At a 28% tax rate: ~$750K potential refund
Do this calculation for each year since 2022. The numbers add up fast.
CREDIT OPPORTUNITY: Don't forget the R&D credit that many businesses never claimed. This is separate from and in addition to the deduction:
- Worth 8-10% of qualified expenses
- That's another $240K-300K per $3MM in qualified expenses
- Available every year
Total opportunity: ~1MM+ per year for many businesses with $3MM in R&D spending.
The Startup Advantage
For startups with less than $5MM in gross receipts and no gross receipts before the 5-year period ending with the current tax year, there's an incredible benefit:
No profit? No problem. The credit can offset payroll taxes up to $500K per year. That means quarterly refunds—even pre-revenue companies can get checks from the IRS.
Most founders I work with never knew this existed.
Action Items
- Pull your 2022-2024 tax returns
- Look for "Section 174 capitalization" or R&D amortization
- Multiply the amounts by your tax rate to estimate your refund
- Check if you claimed R&D credits (most didn't)
- Call a specialist who understands this area
This isn't just another tax strategy—it's potentially the most significant cash recovery opportunity your business will see this decade.
The Critical Deadline
Small businesses must amend by July 4, 2026. No extensions.
Miss it = no refund, just future deductions.
The ROI on addressing this is massive. I've seen companies recover enough cash to fund their operations for months.
If you're building technology, developing products, or solving technical problems, you probably qualify. Don't leave this money on the table.
Until next time,
|
|
Mitchell Baldridge, CPA, CFP® |