The rules around Research & Development tax deductions have recently changed due to the One Big Beautiful Bill Act (OBBBA), which became law on July 4, 2025. Under the OBBBA businesses will no longer be required to spread out their R&D deductions over multiple years.
Starting with tax years beginning after December 31, 2024 companies can fully deduct domestic R&D costs in the year they were spent. While foreign R&D still needs to be amortized over 15 years, the 5-year amortization period for U.S. research is no longer applicable.
For companies that invest in innovation, whether that's software development, manufacturing, life sciences, engineering, or tech services, this change opens up some real opportunities to improve your cash flow and reduce your tax bill. Many businesses that design, build, or improve software may be leaving money on the table by overlooking the federal Research & Development (R&D) tax credit. While “R&D” often sounds like laboratories and prototypes, software can qualify when it involves solving technical problems through iterative development and testing.
When Do R&D Tax Credits Apply to Software?
To be eligible, activities typically need to align with IRS requirements that look for:
- Technical objective: Building or improving a product, process, or software feature.
- Technical uncertainty: Whether a desired performance or capability can be achieved, or what approach will work.
- Technical approach: Grounded in science or engineering principles, such as computer science for software projects.
- Experimentation: Trying new methods to reach a solution. Such as developing alternatives, running tests, measuring results, and refining designs.
In practice, qualifying projects often involve more than routine coding. They include design decisions and testing cycles aimed at resolving a real technical unknown. Such as:
- Creating new functionality or materially improving existing software performance.
- Designing architecture for scalability, security, or reliability.
- Developing algorithms, data processing methods, or automation logic.
- Building integrations where compatibility, throughput, or stability is uncertain.
- Conducting load testing, performance tuning, and iterative refactoring tied to measurable technical goals.
What types of Software do not qualify?
Businesses should be careful not to overreach. Items frequently excluded include:
- Routine maintenance, minor enhancements, or “keep-the-lights-on” work.
- Cosmetic UI updates without technical uncertainty.
- Research performed outside the United States.
- General administrative time not tied to qualified activities.
Some internal-facing software can also involve additional eligibility hurdles, so it’s important to evaluate those facts carefully.
Associated Costs and How the Credits Apply
If the underlying work qualifies, the credit generally focuses on certain qualified research expenses, which commonly include:
- Employee wages for those performing or directly supporting eligible work.
- Supplies used in qualifying activities.
- Certain contractor costs (subject to limitations and substantiation).
Required Documentation
A strong claim usually connects:
- the technical problem,
- the alternatives considered,
- testing/iteration performed, and
- the people and costs involved.
Helpful documentation can include project tickets, sprint notes, design documents, test results, release notes, and time/cost allocations, kept in a consistent and defensible method.
Amending Old Returns Under the OBBBA
Under the new law, eligible small businesses can go back and amend their 2022, 2023, and 2024 tax returns to claim full deductions for domestic R&D costs they previously had to capitalize. This rule applies to all R&D, not just software development.
Businesses that meet the gross receipts test under IRC §448(c), defined as businesses with average gross receipts are under about $31 million (this figure is indexed for inflation), will qualify.
Instead of waiting years to get the full benefit of your R&D deductions, you could amend those returns and potentially receive a refund check.
Next Steps for Businesses
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Checking eligibility for amendments.
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Modeling transition options. Businesses should assess their options and see which tax plan is best for their individual needs.
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Keeping all documentation. Solid documentation of a company’s R&D activities is essential.
Conclusion
If your company spends money on research and development, the trusted Chugh, LLP accounting team can help check your eligibility, explore amendment opportunities, and run the numbers on transition elections and credits.
