Permanent Fix for Sec. 174 R&D Tax Signed into Law

As you’ve likely heard by now, President Trump signed the One Big Beautiful Bill ( “BBB” or the “OBBB”) into law on the Fourth of July, after a marathon vote to get the bill through Congress. While there are no shortages of opinions and commentary on the new tax law, one change is critically important to the government contracting, research, and SBIR/STTR communities: the immediate restoration of R&D expenditures…putting to rest a nightmare that threatened the govcon community, our economy, and scientific & technological advancement in the United States.

In Trump’s first term, the Tax Cuts and Jobs Act (TCJA) of 2017 rewrote IRS sec. 174 so that any company that performed R&D work could no longer deduct R&D expenses but was instead forced to amortize them over 5 years (or 15 years for foreign R&D) starting in 2022. This change was catastrophic for many tech companies, and particularly government contractors and grantees performing research, forcing many to pay astronomically high tax bills on non-existent “profits” (SBIR award funding, for example), or taking the risk of waiting, or changing how they categorized R&D expenses—and hoping for the best.

Thankfully, with the BBB, Section 174's reverting back to immediate R&D expense deduction provides much-needed relief to the tech and research communities.

Beyond the immediate deduction of (domestic) R&D expenditures, the other important changes related to R&D are:

1. Software development is now treated as an R&D expense and can be deducted under 174
2. The changes are effective starting January 1, 2025, AND
3. Small businesses with average annual receipts of less than $31M can retroactively apply these changes to all of their R&D expenses from 2022-2024 and claim refunds on income taxes paid in those years, BUT you must take this election within one year of the bill's enactment

We are thrilled to see this enormous problem finally solved for the govcon community, and are thankful for the advocates in the industry and especially to the Small Business Technology Council (SBTC) which led the charge to fix this critical issue over the last two years!