The Research & Development (R&D) Tax Credit has long been a powerful tool for businesses that innovate, design, and improve products or processes. The One Big Beautiful Bill (OBBB) brings important changes that expand eligibility, increase potential savings, and make it easier for more businesses to benefit—especially small and mid-sized companies.
🔍 What is the R&D Tax Credit?
The R&D Credit rewards companies for developing new or improved products, processes, software, or techniques. Contrary to popular belief, it’s not just for scientists in labs—it applies to industries from manufacturing and construction to software development and agriculture.
Qualified activities can include:
- Designing or improving products
- Developing or refining manufacturing processes
- Creating prototypes or models
- Testing and experimenting with new materials or methods
- Custom software development
🆕 OBBB R&D Updates
1️⃣ Increased Credit Amounts for Small Businesses
- Pre-OBBB: Small businesses could apply up to $500,000 of the credit against payroll taxes.
- Post-OBBB: That limit increases to $750,000, providing a larger cash-flow boost for startups and smaller firms without significant income tax liabilities.
2️⃣ Expanded Eligibility for Startups
- The definition of “qualified small business” now includes companies with up to $10 million in gross receipts (previously $5 million), dramatically expanding the pool of eligible companies.
- Startups can claim the payroll offset for up to seven years (up from five).
3️⃣ Streamlined Documentation Requirements
- The IRS is tasked with issuing clearer, more flexible recordkeeping guidelines, making it easier for small businesses to document eligible expenses without excessive administrative burden.
4️⃣ Coordination with Other OBBB Incentives
- Certain clean energy, manufacturing, and technology credits can now be claimed alongside the R&D credit without triggering offset reductions.
- This creates opportunities for “credit stacking” to maximize overall tax savings.
💰 How the Credit Works – Example
Imagine a custom home builder develops a new energy-efficient wall system:
- $400,000 in qualifying research wages, contractor costs, and materials.
- Pre-OBBB: Potential credit = ~$40,000 (based on 10% effective rate).
- Post-OBBB: Same $40,000 credit PLUS possibility to apply $250,000 more against payroll taxes if a startup.
📊 R&D Credit at a Glance
|
Feature |
Pre-OBBB Rules |
Post-OBBB Updates |
|
Payroll Tax Offset Limit |
$500,000 |
$750,000 |
|
Small Business Eligibility |
≤ $5M gross receipts |
≤ $10M gross receipts |
|
Startup Claim Period |
5 years |
7 years |
|
Documentation |
Strict, often burdensome |
Streamlined requirements |
|
Credit Stacking |
Limited |
Expanded opportunities with other OBBB credits |
👷 Who Should Consider the R&D Credit?
- Construction companies developing new materials or building methods
- Manufacturers improving processes or products
- Tech firms creating software or apps
- Agriculture businesses testing new farming techniques
- Engineering & design firms working on client-driven innovation
📌 Action Steps Before Year-End
- Review past and current projects for qualifying activities.
- Gather documentation—time tracking, material costs, prototypes, testing results.
- Work with a tax advisor experienced in R&D claims to ensure compliance.
- Consider timing—new rules mean expanded opportunities for 2025 and beyond.
✅ Bottom Line
The OBBB significantly enhances the R&D Tax Credit for both startups and established companies. With higher limits, broader eligibility, and more favorable rules, this is a prime time to review your activities and claim every dollar you qualify for—whether you’re a tech innovator, construction firm, or manufacturer.
