How to Maximize R&d Expense Deductions

What One Big and Beautiful Tax Bill Could Mean for Cash Flow, Growth, and the U.S. Economy The draft released by the House Ways and Means Committee is making waves nationwide for its potential impact on businesses and the economy. If you’re running a company that invests in innovation, equipment, or beyond, this new proposed bill could fundamentally change your cash flow—and your ability to reinvest. Take XYZ Corp, a mid-sized U.S. manufacturer investing heavily in R&D and equipment. Under today’s tax rules, their ability to fully deduct those investments is limited—and it’s costing them a lot . XYZ profile: • $5M in annual revenue • $2M in ordinary business expenses • $1.5M spent on U.S.-based R&D • $1M in depreciable equipment (5-year MACRS property, bonus eligible, no Section 179 election) In 2024 (current law): • R&D amortization (mid-year convention): only $150,000 deductible in Year 1 • Bonus depreciation at 60%: $600,000 immediate deduction • MACRS depreciation on remaining $400,000: 20% of $400K = $80,000 • Total Year 1 deductions = $2M + $150K + $600K + $80K = $2,830,000 • Taxable income = $5M – $2.83M = $2.17M • Federal tax @ 21% = $455,700 Under the proposed tax bill: • R&D is fully deductible: $1.5M • Bonus depreciation is restored to 100%: $1M deduction • Total Year 1 deductions = $2M + $1.5M + $1M = $4.5M • Taxable income = $500K • Federal tax @ 21% = $105,000 The difference? Same exact expenses. More money in your pocket. • $350,700 in tax savings • 77% less federal tax owed • $1.67M more deducted upfront—freeing up real working capital This isn’t just policy—it’s a powerful change in how companies like XYZ can fund growth. Instead of tying up cash in deferred deductions, this bill lets businesses reinvest in their people, products, and future growth right now. This can translate to hiring, expand more confidently, innovate without hesitation and build long-term stability. This is a significant shift in tax policy—and a meaningful edge for growth oriented businesses. When companies can recover their costs faster, they don’t sit on cash—they typically reinvest it, fueling growth that directly benefits the broader economy. That typically means more jobs, more CapEx, more innovation, and more momentum. This proposed bill offers meaningful benefits to both businesses and individuals—but this is just one simple example of the kind of impact it could have on companies investing in growth. Cash flow fuels growth and proper planning makes it sustainable. #TaxPolicy #BusinessGrowth #RDexpensing #BonusDepreciation #CorporateTax #CashFlowMatters #TaxPlanning #SmallBusiness #Manufacturing #FinanceStrategy #Section179 #MACRS #CapitalInvestment

In the last post, we talked about why the R&D tax credit exists and who can qualify. Now, let’s break down how you can calculate it and use it to save money. 𝗥&𝗗 𝗧𝗮𝘅 𝗖𝗿𝗲𝗱𝗶𝘁 𝗗𝗲𝗰𝗼𝗱𝗲𝗱: 𝗛𝗼𝘄 𝘁𝗼 𝗠𝗮𝗸𝗲 𝘁𝗵𝗲 𝗠𝗼𝘀𝘁 𝗼𝗳 𝗜𝘁 (𝗣𝗼𝘀𝘁 𝟮 𝗼𝗳 𝟯) Let’s Keep It Simple There are two ways to calculate the R&D tax credit. 1️⃣ 𝗧𝗵𝗲 𝗥𝗲𝗴𝘂𝗹𝗮𝗿 𝗠𝗲𝘁𝗵𝗼𝗱 ↳ You get 20% of your research costs above a “base amount.” ↳ That base is tied to your company’s history (like past revenue and research spending). 2️⃣ 𝗧𝗵𝗲 𝗘𝗮𝘀𝗶𝗲𝗿 𝗪𝗮𝘆 (𝗔𝗦𝗖 𝗠𝗲𝘁𝗵𝗼𝗱) ↳ You get 14% of research costs above 50% of what you spent in the past three years. ↳ If this is your first year doing R&D, you get 6% of what you spent this year. My Take - If you’re new to this credit or don’t have a steady history of R&D, go with the ASC method. It’s simpler and less math-heavy. Check out IRS Form 6765. 𝗪𝗵𝗮𝘁 𝗖𝗮𝗻 𝗬𝗼𝘂 𝗖𝗼𝘂𝗻𝘁 𝗮𝘀 𝗥𝗲𝘀𝗲𝗮𝗿𝗰𝗵 𝗖𝗼𝘀𝘁𝘀? Here’s where people get confused. The IRS allows a lot more than just lab costs. Here’s what counts: ↳ 𝗪𝗮𝗴𝗲𝘀: Paychecks for employees working on R&D, or even the managers overseeing it. ↳ 𝗦𝘂𝗽𝗽𝗹𝗶𝗲𝘀: Stuff you use in the research (but not big equipment). ↳ 𝗢𝘂𝘁𝘀𝗶𝗱𝗲 𝗛𝗲𝗹𝗽: If you pay contractors for research, their costs can count too—but you need to own the work they’re doing. ↳ 𝗖𝗹𝗼𝘂𝗱 𝗖𝗼𝘀𝘁𝘀: Hosting software or testing tools during R&D also counts. Not sure if your expenses qualify? The IRS once allowed shipbuilding costs in Trinity Industries v. United States. If ships qualify, your process improvements probably do too. Check with an expert. 𝗪𝗵𝗮𝘁 𝗖𝗮𝗻 𝗬𝗼𝘂 𝗗𝗼 𝘄𝗶𝘁𝗵 𝘁𝗵𝗲 𝗖𝗿𝗲𝗱𝗶𝘁? 1️⃣ Income Tax - Knock down your federal income tax bill. 2️⃣ Payroll Tax - If your company has less than $5M in annual revenue, you can use up to $500,000 to cover payroll taxes. Let's understand: ↳ You spent $100,000 on R&D. ↳ With the ASC method, you could get a $14,000 credit. - If you’re a startup, you can apply that directly to your payroll tax bill. 𝗠𝗶𝘀𝘀𝗲𝗱 𝘁𝗵𝗲 𝗖𝗿𝗲𝗱𝗶𝘁 𝗕𝗲𝗳𝗼𝗿𝗲? You can go back and fix it. The IRS lets you amend returns from the last three years to claim missed credits. Even better, if your credit is bigger than your tax bill, you can: ↳ Carry It Back for one year. ↳ Carry It Forward for 20 years. In Post 3 - we’ll talk about the common myths and how to avoid mistakes when claiming this credit. #TaxBytes with #YourTaxGuy

The R&D tax credit math is wild. Let me show you what the One Big Beautiful Bill (OBBB) means for tech companies who've been building since 2022: A software company with $3MM in R&D expenses in 2022: • Pre-TCJA would have deducted the full $3MM • Post-TCJA could only deduct $300K (10% in year one) This created two problems: 1. Companies owed taxes on phantom profits 2. Many skipped claiming the R&D credit altogether The OBBB fix creates TWO recovery opportunities: 1. The DEDUCTION fix: • $3MM in R&D for 2023 • Previously deducted: $300K • Trapped in amortization: $2.7MM • At 28% tax rate: ~$750K potential refund from amended returns 2. The CREDIT opportunity: • Separate from the deduction • Worth 8-10% of qualified expenses • That's another 240K−300K per $3MM in R&D • Available every year Total opportunity: ~$1MM per year on $3MM in R&D spending. For startups (≤$5MM receipts): No profit? No problem. The credit can offset payroll taxes up to $500K/year. Quarterly refunds. Even pre-revenue companies can get checks. Action items THIS WEEK: 1. Pull your 2022-2024 returns 2. Find "Section 174 capitalization" 3. Multiply by your tax rate 4. Check if you claimed credits 5. Call a specialist This isn't just another tax strategy—it's potentially the most significant cash recovery opportunity your business will see this decade.

Founders, do yourself a favor, and claim those tax credits!!!! More specifically, the R&D tax credit. Money is tight, you hired a dev team and want to explore ways to extend your runway. Don't forget about that credit. Every industry is different, so I'll only speak for what I know: tech and gaming. Here’s what you need to know: 1. What is the R&D Tax Credit? - It's designed to reward businesses for investing in innovation.  - If you’re developing software, creating new products, or improving processes. 2. Who qualifies? - It’s not just for billion-dollar enterprises.  - Even early-stage startups with no taxable income can claim it. - And apply it against payroll taxes. 3. How much is it worth? - Federal credits can go up to 10% of your qualified R&D expenses.  - Many states also offer additional credits, they stack on top of the federal one. 4. What qualifies as R&D? - Think about any work your dev team or engineers are doing to create new products, features, or technologies. - Developing new software or gaming engines. - Improving algorithms for better performance. - Conducting user research to refine your product. 5. What’s the process like? - Hire a specialized firm to perform the heavy lifting for you. - They’ll help you identify all qualified activities, and navigate IRS regulations. 6. Common misconceptions: - “I don’t have any taxable income, so this doesn’t apply to me.” -> Nope. You can apply the credit to payroll taxes even if you're pre-revenue. - “This is only for huge companies doing scientific work.” -> Not true. R&D can include incremental improvements to existing tech or processes. So do yourself a favor, hire an expert and get that credit back. It's not that complicated. Ping me if you need more details.

The One Big Beautiful Bill just reversed Section 174 — one of the most damaging tax changes for R&D-heavy companies. The Tax Cuts and Jobs Act of 2017 required companies to capitalize and amortize R&D expenses over 5 years for domestic R&D and 15 years for foreign R&D, starting in tax year 2022. This disproportionately affected tech companies, whose primary expenses are related to building and innovation (i.e., R&D). Even unprofitable companies could face tax bills due to having to amortize R&D expenses over time rather than deducting them immediately. Under the One Big Beautiful Bill (for stock acquired after July 4, 2025): → Domestic R&D can be expensed immediately. → Software development is explicitly included as qualifying R&D. → Small businesses (with average annual gross receipts of $31 million or less) can retroactively apply the new rules to tax years 2022–2024 and reclaim deductions for R&D expenses that were previously amortized. Startups should begin to see a reduced tax burden — exactly when capital is most critical. R&D-intensive businesses shouldn’t be penalized for investing in innovation.

On July 4, 2025 the One Big Beautiful Bill (OBBB) was signed into law—and it’s a game-changer for businesses investing in domestic research and experimentation. Here’s what you need to know: ✅ Full expensing is back for domestic R&E costs starting in 2025 under new section 174A ✅ Small businesses (gross receipts <$31M) can retroactively apply the new rules to 2022–2024 by filing amended returns to claim tax refunds ✅ Large businesses can accelerate deductions over one or two years starting in 2025 ✅ Foreign R&E still requires 15-year amortization ✅ R&D credit planning is back in focus—especially for those who paused due to section 174 changes Whether you’re amending past returns, planning for 2025 or re-evaluating your R&D credit strategy, now is the time to act. Our R&D experts are here to help you make the most of this opportunity by maximizing deductions, optimizing credit claims and improving cash flow. Daniel Marques and Tom Pyevich break it all down in our latest video. For more info and to connect with an expert, visit our tax page: https://ow.ly/h5vQ50WoYA6