By: PJ Donohue, CPA
On July 4th of this year, the US enacted the “One Big Beautiful Bill Act” (OBBBA), making permanent changes to how research and development expenses are treated for tax purposes. Here is what SBIR Grant recipients need to know to navigate these changes effectively. (These provisions apply to both SBIR and STTR awards, which we’ll collectively refer to as “SBIR” throughout this article.)
Rewind to 2017
In late 2017, the US enacted the “Tax Cuts and Jobs Act” (TCJA), which made significant changes to the overall US tax code. One provision within it, IRC section 174, was enacted with a time delay set for 2022. Before this time-delayed provision, companies were allowed an immediate and full deduction of all Research and Development expenditures. For SBIR grantees, this meant that as grant income was recognized, the offsetting R&D spend resulted in net-zero taxable income.
Fast-forward to 2022
Beginning in 2022, that time-delayed provision from TCJA, Section 174, went into effect. The new 174 provision required all direct R&D expenditures, as well as an indirect overhead allocation, to be capitalized, and the expense was split across five years (fifteen years for R&D performed outside the U.S.), with only a half-year allowed for year one. For SBIR grant recipients, this meant that while grant income was still included as taxable income, only 10% of their R&D spend was allowed as an offsetting deduction. For those startups without additional funding sources, founders were often left scrambling for cash to pay a tax bill on a company that was not profitable for all purposes except for taxes.
Where we are now in 2025
With the passing of the “One Big Beautiful Bill Act” (OBBBA), IRC Section 174 was amended by IRC Section 174A to again allow full and immediate expensing of all domestic R&D spend. Foreign R&D is still relegated to a fifteen-year expense timeline. For all taxpayers, this went into effect beginning in 2025; however, OBBBA also carved out an exception for small businesses, those companies with average sales of less than $31 million. For small businesses, the changes to 174 can be applied retroactively to apply to the 2022-2024 tax years.
Moving forward
For companies that meet the small business qualification and were forced to pay tax for 2022 through 2024, they should consider amending prior returns to make a claim for refund for any tax paid in those years. However, companies only have until July 2026 to make these refund claims. Companies should also anticipate significant delays in the IRS processing these refund claims, which has only been exacerbated by the current government shutdown.
For companies that are not small businesses or paid little to no taxes in 2022 through 2024, they can instead apply this change prospectively beginning in 2025 and can even recover any unamortized costs from prior years.
Here to help
If you would like help in navigating these changes or making a refund claim, please reach out to our team via email or schedule a meeting using the link below.
