Between now and July 6, companies will have a narrow time limit to retroactively recover research and development tax deductions from up to the previous three years. But once that window closes, those opportunities will vanish.
The July 6 deadline roughly coincides with the one-year anniversary of the One Big Beautiful Bill Act, which was signed into law on July 4, 2025. The mammoth tax and spending package contained a number of provisions, including a change in the rules for deducting R&D expenses. The Tax Cuts and Jobs Act of 2017 had begun to require companies to amortize them over a five-year period instead of writing them off in the first year, starting on Jan. 1, 2022. After years of intense lobbying by companies trying to prevent that requirement from taking effect, the OBBBA restored the ability for U.S.-based companies to write off their domestic research and experimentation expenses in the first year, but not for foreign activities. It also included a retroactive election window for small businesses with under $31 million in average gross receipts to amend their 2022–2024 returns and potentially recover significant tax refunds, but that window closes on July 6 of this year.
"We have noticed some amended returns," said Michael Smith, director of tax, strategic partnerships and alliances at ADP. "The amendment period is the earlier of the refund statute of expiration. If you had a timely filer on March 15 or April 15 for 2022, they had to do the amended return by that time. Otherwise, if they filed under extension, they have until July 6, 2026, the one-year anniversary of the One Big Beautiful Bill. We are seeing a level of activity increasing of people going back, wanting to amend those returns to take advantage of that favorable treatment on the expensing portion and secure their cash refunds back from the IRS."
Businesses had long expected Congress to eventually repeal the five-year amortization requirement in the TCJA. The OBBBA also included retroactive relief, allowing eligible small businesses with average annual gross receipts of $31 million or less to retroactively apply full expensing to their domestic R&D costs for tax years 2022 through 2024.
"When the law changed in '25, you saw this special protection for businesses that had average gross receipts of under $31 million," said Rick Lazio, a former U.S. congressman and current senior vice president at the tax consulting firm Alliant. He noted the language came in part from the corporate alternative minimum tax exemption for businesses with gross receipts under $50 million. "That provided retroactive relief to those smaller businesses, but when they passed it, they said we're going to have a window here and you are going to either file this statement or you're going to be out of luck. You've got to file it within one year of enactment, and that's July 6."
Far more businesses are eligible for the tax break than is generally understood. "There's lots of misinformation," said Lazio. "A lot of businesses qualify that don't think they qualify. Even some CPAs don't always understand the nuances of how you can qualify. For example, the $31 million is not an annual requirement. It's an average of three years, and there are other issues, including consolidation issues, that people need to be aware of, so it's not something you can do on the back of a napkin."
Not only large corporations can qualify for the R&D expensing tax break, but also small businesses.
"We still find one in three companies only take advantage of R&D expensing, mainly because they don't realize they qualify for R&D," said Smith. "Many people think it is the larger companies, such as Apple, Google, Ford or GM, but many small companies qualify. It's an activity-based credit, so they are actually performing activities that are leading to innovation and development of new processes. Think of it in terms of the post-pandemic period, where people are trying to do more production, perhaps with less people, and they're actually going through thought processes, through research and development activities that will lead them to making their small and medium sized businesses more successful."
State decoupling
One complexity is that some states are "decoupling" and not implementing all the provisions of the OBBBA, including Michigan, as a way to preserve their state tax revenue. Previously, Michigan had "rolling conformity" tying its state tax laws with the federal tax laws.
"Michigan, for the first time in my career, that I can recall, they affirmatively opted out of some of the OBBA changes," said Brian Schultz, leader of Plante Moran Wealth Management's tax practice. "The reason they're doing this is if they followed the federal law, they'd lose out a fair amount of state revenue, so they're trying to figure out what the impact of OBBBA would be to their state budget if they don't decouple."
Michigan isn't following the OBBBA on reinstating 100% bonus depreciation as well as on immediately writing off R&D expenses. "For the last few years, businesses that had research and development expenses had to capitalize those and write them off over five years," said Schultz. "Now with the OBBBA, not only can I expense in 2026 all my R&D expenses immediately, but also for costs that I previously capitalized, I could catch up for the write-off that I had to forego, let's say, for 2023 and 2024 R&D expenses. If I was capitalizing and writing them off over time, the OBBBA also had a couple of catch-up options where companies could essentially either amend go back and amend those returns, and take the additional R&D deductions, as they had always been able to expense them in the year incurred, or you could catch up on a future year return to write them off, so there's just a huge amount of potential deductions that are now available more quickly. Michigan is one of the states that chose not to follow the R&D treatment, either. For Michigan taxable income, we're still looking at those R&D expenses and deducting those over a five-year period for Michigan income tax, even though on federal, now you can deduct them up front."
Other states decoupling to some extent, at least on retroactive deductions, include California, Delaware, Maryland, New York, Pennsylvania, Rhode Island, Virginia and the District of Columbia.
Businesses and their tax advisors shouldn't assume they can't claim the tax break. "It's a meaningful benefit for smaller businesses," said Lazio. "What we see all the time is that some of these smaller businesses self-censor. They make a judgment: Oh, we're not eligible, or we didn't realize we can go back and retroactively file amended returns and take advantage of getting this money. A big part of the challenge is education. Just be aware you have the option. You can make a decision, but get the information in front of you, so you know whether you potentially could qualify for those one, two or three years. Whether or not you claim the R&D credit, you should go back and file your statement so you can expense on an ongoing basis, and you can decide later whether you want to take the credit. But this window where you can file this election statement to allow you to treat research and expenditure costs as an expense, that should be done regardless. It should be a relatively straightforward point for both the CPAs and for their clients."
AI for R&D
Even companies that have used artificial intelligence programs to help them with writing programming code or doing other kinds of R&D work may be able to qualify. On the other hand, it's important for businesses to consult with a human tax advisor when they file their R&D claims and not just rely on advice from an AI chatbot when filing claims for R&D expenses or for the related R&D tax credit.
"For people that try it and qualify for a credit, which is very complex, it requires professional advice," said Lazio. "It's a huge mistake.
He noted that the
"Whether it's a provider that has not had much history, doesn't have much depth, or it's some business that tries on the cheap to qualify using AI, it's a huge mistake," said Lazio. "You're asking for audit trouble, and in the case of many of the tax consultants that have sprung up since the employee retention credit, they're not going to be around a few years from now. If you get audited, and they relied on AI to do a study, and there was no independent verification, no human judgment involved, that is a huge red flag. Businesses want to be asking, how do you use AI? Do you use AI in the development of an R&D study? CPAs are responsible for the numbers they put on the returns, and they need to have a reasonable sense that those numbers were grounded. They also need to ask tough questions about the use of AI. AI can be a very slipshod, lazy, quick, but flawed way, especially while we're still working through hallucinations and things like that, to do this. Don't use AI to file your R&D credit. That's a big red flag for the IRS, and you're looking at trouble down the road."
He noted that large companies have been investing more heavily in AI development than smaller ones. "These smaller businesses don't have the capital or the expertise or technological support to be able to keep up with that, and if they don't, they are going to fall badly behind," said Lazio. "That would be a bad outcome for the American economy. One way you could finance exploring how AI works for you as a small business is by taking advantage of the R&D tax credit. The proceeds of the money that comes back on those refunds can be used to incrementally explore how AI can benefit your operations, and potentially also depending on whether it's done internally, it might even be a qualified activity in certain technical cases."
Companies are using AI to do "vibe coding" of their own applications. "We are seeing many businesses develop their own apps, for instance, to maybe interact with their customers or employees, maybe their vendors and suppliers," said Smith. "Some of those creations on the app side, AI or not, can also possibly be a qualified R&D activity as well. Some develop it internally. Some may pay perhaps a third party developer, and it could be kind of a joint or collaborative effort as well."
The IRS has been requiring companies to
"It's absolutely critical that the taxpayer properly documents all their qualified activities for the credit," said Lazio. "This is a law that's being phased in, beginning this year. That is going to require more upfront disclosure of your calculations and your activities."
Companies will need to have proper studies done by tax professionals documenting their R&D claims.
Some industries have long been claiming R&D tax credits and expenses, but other industries may be unaware they qualify as well. "As far as businesses that qualify, there are certain industries that lend themselves to eligibility, like manufacturing, technology, life sciences," said Smith. "Really any and all businesses can qualify if they have qualified R&D activities. That's why there's a number of companies that still do not recognize that they're doing qualified R&D, and they've missed the benefit from the tax credit. None of those eligibility requirements were changed in the One Big Beautiful Bill. Those all remain the same."
However, the OBBBA excludes foreign companies from immediate write-offs of R&D expenses.
"The most recent bill focused on domestic, but some people don't realize that it's not just W-2," said Lazio. "It can be consulting. You do have people who have a consulting relationship with the enterprise. Those expenses can qualify for R&D credit purposes."
That relief applies to both 1099 and W-2 workers in the U.S. But if the work is done outside the U.S., businesses will need to write off the expenses over a five-year period. Otherwise they will need to move the work back to the U.S. because part of the rationale behind the law was to bring more business operations back home.
