The landscape of research and development tax incentives has undergone a significant transformation following the passage of the One Big Beautiful Bill Act (OBBBA) in July 2025. For businesses investing in innovation, these changes represent both tremendous opportunities and important compliance considerations as we move into 2026. At CSSI, we’re committed to helping you navigate these changes strategically to maximize your tax benefits.

The Return of Immediate R&D Expense Deductions

One of the most impactful changes affecting businesses in 2026 is the restoration of immediate expensing for domestic research and experimental expenditures. Under Section 174A, companies can now deduct domestic R&D expenses in the year they’re incurred, rather than capitalizing and amortizing them over five years as required since 2022.

What Changed and Why It Matters

The Tax Cuts and Jobs Act of 2017 required businesses to capitalize and amortize research costs starting in 2022, creating significant cash flow challenges for R&D-intensive companies. The OBBBA reverses this requirement for domestic R&D, effective for tax years beginning after December 31, 2024. This means:

• Domestic R&D expenses can be fully deducted in 2025 and beyond
• Foreign R&D expenses must still be amortized over 15 years
• Taxpayers can elect to capitalize and amortize domestic R&D expenses over at least 60 months if that approach better suits their tax planning

This change dramatically improves cash flow for companies investing in U.S.-based innovation and removes a major barrier that had discouraged R&D investment since 2022.

Critical Retroactive Relief Opportunities

The OBBBA includes two important transition rules that create substantial refund opportunities for businesses that capitalized R&D expenses in recent years.

Catch-Up Deductions for All Taxpayers

All taxpayers can elect to deduct any remaining unamortized domestic R&D expenses from 2022-2024 using one of two approaches:

• Full deduction in 2025: Claim the entire remaining balance on your 2025 tax return
• Split deduction: Deduct 50% in 2025 and 50% in 2026

This flexibility allows businesses to optimize their tax strategy based on projected income and tax positions for the next two years.

Special Retroactive Relief for Small Businesses

Qualified small businesses, those with average annual gross receipts of $31 million or less over 2022-2024, have an additional option that could provide even greater benefits. These businesses can elect to apply the new immediate expensing rules retroactively to domestic R&D expenses incurred in 2022, 2023, and 2024 by amending those returns.

Critical deadline: Small businesses must make this election by July 4, 2026. This creates a limited window to capture potentially substantial refunds.

According to IRS Revenue Procedure 2025-28, small taxpayers who deduct research expenses on a timely filed 2024 return (due by November 15, 2025 for those on extension) are deemed to have made the election even without an attached statement. However, if R&D expenses were incurred in 2022 or 2023, these businesses must also amend those prior years’ returns to apply the election consistently.

Important note: While amended returns currently take over nine months to process at the IRS, the potential refunds for 2022-2024 R&D expenses could be substantial enough to warrant the wait.

New Form 6765 Reporting Requirements

Beyond the substantive changes to R&D expense treatment, businesses claiming the R&D tax credit in 2026 must prepare for enhanced reporting requirements on Form 6765, Credit for Increasing Research Activities.

Section G: Business Component Information

The IRS has introduced Section G to Form 6765, which requires detailed, project-level documentation of R&D activities. While this section is optional for the 2025 tax year, it becomes mandatory for most filers starting with the 2026 tax year (returns filed in 2027).

What Section G requires:

• Names and types of business components (products, processes, software, formulas)
• Description of information sought to be discovered through research
• Breakdown of qualified research expenses by business component
• Detailed wage expenses categorized by direct research, direct supervision, and direct support

Exemptions from Section G

Starting in 2026, certain taxpayers may omit Section G reporting:

• Qualified small businesses electing the payroll tax credit under IRC Section 41(h)
• Taxpayers with total qualified research expenses of $1.5 million or less (at the control group level) and gross receipts of $50 million or less

Preparing for Enhanced Reporting

The IRS has extended the comment period for the draft Form 6765 instructions through March 31, 2026, and will release final instructions in January 2026. Even though Section G is optional for 2025, we strongly recommend using this year as a dry run to align internal documentation systems and ensure readiness for mandatory reporting in 2026.

Coordination Between R&D Credits and Deductions

A critical aspect of R&D tax planning involves the coordination between the R&D tax credit (Section 41) and R&D expense deductions (Section 174A). The IRS prevents a “double benefit” through Section 280C(c), which requires businesses to reduce their R&D expense deductions by the amount of credit claimed.

Two approaches are available:

• Full credit with reduced deduction: Claim the full R&D credit, then reduce your R&D expense deduction by the credit amount
• Reduced credit (Section 280C election): Take a reduced R&D credit (credit amount minus the highest corporate tax rate) with no adjustment to the expense deduction

With the restoration of immediate expensing in 2025, most businesses will likely find the reduced credit approach more beneficial, similar to how R&D credits worked before 2022.

Strategic Planning Considerations for 2026

Immediate Actions for 2025-2026

• Evaluate eligibility as a small taxpayer: Determine if your business qualifies for retroactive relief under the $31 million gross receipts threshold
• Review 2022-2024 R&D expenditures: Identify remaining unamortized balances that could be deducted in 2025 or split between 2025-2026
• Consider amended returns: For small businesses, evaluate whether amending 2022-2024 returns provides greater benefit than the prospective catch-up deduction
• Prepare for Section G reporting: Begin organizing business component documentation, even though it’s optional for 2025
• Update documentation processes: Implement systems to track R&D expenses at the project level for future Section G compliance

Industries That Benefit Most

While technology and biotech companies are obvious beneficiaries of these R&D tax changes, the benefits extend across many industries:

• Manufacturing companies developing new production processes or improving existing ones
• Architecture and engineering firms designing innovative building systems or sustainable construction methods
• Food and beverage companies creating new products or formulations
• Software developers and technology companies across all sectors
• Automotive companies advancing vehicle technology and efficiency
• Aerospace and defense contractors

The key is whether your business is engaged in qualified research activities aimed at developing new or improved business components through a process of experimentation to resolve technological uncertainty.

State Tax Conformity Considerations

It’s important to note that not all states automatically conform to federal R&D expense treatment. States have varying levels of conformity to the Internal Revenue Code:

• Rolling conformity states: Automatically adopt federal changes
• Fixed-date conformity states: Conform to the IRC as of a specific date and require legislative action to update
• Selective conformity states: Pick and choose which federal provisions to adopt

For example, California conforms to the IRC as of January 1, 2015, and already permits full expensing of R&D costs under its pre-TCJA rules. Businesses operating in multiple states should work with tax advisors who understand both federal and state implications of these R&D tax strategies.

The Qualified Small Business Payroll Tax Credit

Startups and early-stage companies should be aware that the qualified small business payroll tax credit remains available. Eligible businesses with less than $5 million in gross receipts can apply up to $500,000 of their R&D credit against payroll taxes annually, even if they have no income tax liability.

This provision is particularly valuable for companies in growth mode that are not yet profitable but are investing heavily in research and development.

How CSSI Can Help

The R&D tax landscape in 2026 presents both significant opportunities and complex compliance challenges. At CSSI, we specialize in helping businesses navigate these intricate tax provisions to maximize benefits while ensuring full compliance.

Our R&D tax credit services include:

• Comprehensive R&D credit studies identifying qualifying activities and expenses
• Analysis of retroactive relief opportunities for 2022-2024 R&D expenses
• Small business eligibility determination and amended return preparation
• Section G business component documentation and Form 6765 preparation
• Strategic tax planning to optimize the interaction between R&D credits and expense deductions
• State tax conformity analysis for multi-state operations

Don’t leave valuable tax benefits on the table or miss critical deadlines. The window to claim retroactive relief for small businesses closes on July 4, 2026, and proper preparation for enhanced 2026 reporting requirements begins now.

Conclusion

The restoration of immediate R&D expense deductions marks a return to tax policy that actively encourages domestic innovation. Combined with the availability of R&D tax credits and special transition rules for previously capitalized expenses, 2026 presents an unprecedented opportunity for businesses to reduce their tax burden while investing in innovation.

However, these benefits come with increased documentation requirements and complex coordination rules that demand careful planning and expert guidance. Whether you’re evaluating retroactive relief opportunities, preparing for enhanced Form 6765 reporting, or developing a comprehensive R&D tax strategy for the years ahead, the time to act is now.

Contact CSSI today to discuss how these R&D tax changes affect your business and to develop a strategy that maximizes your tax benefits in 2026 and beyond.