Since the passage of the Tax Cuts and Jobs Act in 2017, there has been considerable tension and concern among companies heavily concentrated in innovation and R&D. The One Big Beautiful Bill Act, signed into law on July 4th, 2025, by President Trump alleviates some of these concerns. This article discusses the key innovation-related issues at play from the prior passage of the TCJA. I then discuss the three primary ways that the Big Beautiful Bill will impact innovation and R&D moving forward.
Innovation And R&D Before The Big Beautiful Bill
In the U.S., R&D expenses have typically been able to be immediately expensed as incurred, according to The Tax Adviser. This deduction allows companies to expense qualifying R&D activities (also known as specified research and experimentation (SRE)) for tax purposes, resulting in significant tax benefits. These tax benefits primarily come in the form of time value of money benefits, as they allow the company to take a tax deduction immediately, rather than capitalizing the costs and having to wait many years for the expense to be fully expensed. As shown by GBQ, these time value of money benefits can be material for most innovative firms. There are also natural benefits from a cash flow perspective.
The TCJA changed this treatment considerably. Starting in 2022, companies must now capitalize and amortize their R&D expenses over five years for domestically sourced R&D and 15 years for R&D performed outside of the U.S. The Bipartisan Policy Center argues that this change “threatens the survival of some small businesses that are research-intensive and not yet profitable.” For instance, a company trying to get off the ground might not be able to part with the cash flows and tax benefits of an R&D project for up to 15 years.
3 Key Ways The Big Beautiful Bill Affects Innovation And R&D
The Big Beautiful Bill made a critical change to Section 174 of the Internal Revenue Code by allowing companies to immediately expense domestic R&D. As I previously discussed in a Forbes article, the change to expensing rules surrounding R&D is among the most impactful changes to businesses and corporations out of the entire Big Beautiful Bill. This change was celebrated widely across innovative industries as it now allows U.S. companies to have the innovation edge that they had previously grown accustomed to having. There are three critical impacts that the Big Beautiful Bill has on R&D:
(1) The Big Beautiful Bill Allows For Immediate Expensing For Domestic R&D
As discussed by Anchin, the Big Beautiful Bill now allows companies to immediately expense domestically-sourced R&D in the year in which the costs were incurred. This means that companies will no longer have to wait a full five years to recover all of their R&D costs, which is the rule that was enacted starting in 2022.
However, the Big Beautiful Bill still allows companies to capitalize and amortize costs if they choose to do so. This act would mean that the company would choose the period length of the R&D project (or a period of at least 60 months) and amortize the costs over that period. This useful tool enables companies with financial flexibility to recognize costs and manage earnings as they see fit.
(2) The Big Beautiful Bill Makes No Changes To Expensing For Foreign R&D
While the immediate expensing of R&D accrues for domestic R&D, no such changes are being provided for foreign R&D. Notably, the TCJA requires foreign R&D to be expensed over 15 years, leading to significant costs for U.S. companies that house their R&D outside of the U.S.
Even though the TCJA created an innovation wedge by allowing differential tax benefits for domestic versus foreign R&D, the Big Beautiful Bill has only grown the wedge by not requiring domestic R&D to be capitalized and amortized. According to RSM, these impacts are substantial to the point that companies will need to actively determine whether their foreign R&D should be moved back to the U.S. Given other R&D-related tax costs (i.e., the GILTI and BEAT tax provisions), companies will need to factor in this increased wedge of tax benefits for domestic versus foreign R&D.
(3) Under The Big Beautiful Bill, Companies Can Retroactively Expense Domestic R&D From Prior Years
While the capitalizing and amortizing effects from the TCJA took effect in 2022, the Big Beautiful Bill allows for the retroactive implementation of the expensing. This effect means that the domestic R&D costs that were capitalized and amortized in 2022, 2023, and 2024 can now be expensed.
However, the way that these costs can be expensed depends primarily on the company’s size. According to The Tax Foundation, eligible small businesses, defined as companies with annual gross receipts of $31 million or less for the prior three years, can amend prior returns and claim full deductions for the years 2022, 2023, and 2024. For all other firms, the capitalized and amortized R&D expenses can be spread out over the 2025 and 2026 tax years. This retroactive implementation means that many businesses (particularly those that rely on innovative activities) can expect cash windfalls by way of significant expensing of these activities.
While the R&D expensing rules under the Big Beautiful Bill will significantly impact when and to what extent companies can expense their R&D costs, the law does not substantively change R&D tax credit rules. As companies will have significantly greater R&D tax benefits through immediate expenses, these tax law changes are expected to lead to significantly greater innovation outputs, resulting in lower costs for innovative activities. For instance, under the Big Beautiful Bill, companies will now be able to immediately expense their R&D leading to both increased tax and cash flow benefits. These benefits naturally make R&D cheaper, leading to innovative companies increasing their investments in innovation.
However, these tax and cash flow benefits from the Big Beautiful Bill came with the caveat of an increased wedge between foreign and domestic R&D. Notably, companies with significant R&D activities overseas will not benefit as much from these tax law changes since they will have to continue amortizing foreign R&D over 15 years. Meanwhile, their competitors with more domestic innovation activities will receive considerable benefits under the new rules. Consequently, some companies will need to assess the financial implications of onshoring their R&D activities.