Article
R&D tax planning for 2025 and 2026
Planning considerations for early-stage technology and life science companies
April 13, 2026 · Authored by May Lee and Christa Laughland
The big picture: Why this matters for your company
If your company invests in research and development (R&D), the way you report costs on your tax return plays a meaningful role in your overall tax strategy.
The One Big Beautiful Budget Act (OBBBA), signed into law in July 2025, introduced a new framework for deducting R&D costs. For companies operating at a loss, the immediate impact may feel minor. However, for those planning for profitability, positioning for an acquisition, or anticipating an IPO in the next few years, the decisions made now can have a real impact on future tax liabilities.
A quick history: How we got here
For many years, the tax rules for R&D were relatively founder friendly. Companies could generally deduct their research costs in the year incurred. The treatment was straightforward and aligned well with economic reality.
That changed in 2022, when a provision from the 2017 Tax Cuts and Jobs Act (TCJA) took effect and required companies to capitalize their R&D costs and amortize them over several years. For companies spending heavily on research, this created a significant mismatch — real cash outflows were no longer matched with corresponding tax deductions.
The timing issue hit startups in the tech and life science space particularly hard. Collaboration agreements, licensing deals and partnership arrangements often generate significant upfront or milestone-based revenue. Under the old rules, that revenue was typically offset by concurrent R&D spending — resulting in little or no taxable income in those years. Under the new rules, those same expenditures were no longer immediately deductible, leaving unexpected and sometimes substantial tax bills in years assumed to be tax neutral. This mismatch was one of the most frustrating and unanticipated consequences of the change.
In response, Congress has been working toward a solution, culminating in the OBBBA.
What the new rules actually change
Immediate expensing is available again — but not automatic
Under the new framework, companies can once again choose to deduct domestic R&D costs in the year they are incurred, rather than spreading them over multiple years. However, this is not an automatic or default position. Both immediate expensing and capitalization require a formal accounting method change — a specific filing with the IRS — and once made, that method applies for a meaningful period going forward.
Capitalizing still has a place — and a different strategic logic
Companies may also choose to capitalize their R&D costs and deduct them over time. Under the new rules, the amortization periods for domestic research are broadly similar to what applied under the prior mandatory capitalization regime (roughly five years for domestic costs, though the exact mechanics of how that period is measured differ from the prior rules). For foreign R&D, the same longer amortization window that existed as a part of TCJA before remains unchanged, requiring a fifteen-year amortization period.
That asymmetry between domestic and foreign R&D is intentional. By allowing faster cost recovery for U.S.-based research and maintaining the longer write-off period for foreign work, Congress is signaling a preference for domestic R&D. For companies with offshore research arrangements, contract research organizations or development work happening in foreign subsidiaries, this cost differential (not to mention the ongoing tariff debate) is worth factoring into operating structure decisions.
A word on method change mechanics
The method change filing is the commitment point — not a casual checkbox. Depending on the circumstances, it may involve a full IRS Form 3115 or a simplified statement in lieu of that form. Either way, once filed, taxpayers are generally locked in for a period of years, and reversing course requires IRS consent.
An additional annual tool: Election under IRC Sec 59(e)
Separate from 174A under OBBBA, companies may use an annual election under IRC Sec 59(e) to capitalize certain R&D costs and amortize them over a 10-year period. On the face, it offers an approach that is slower than immediate expensing and more spread out than the five-year OBBBA capitalization approach.
The appeal of this tool is annual and cost flexibility. Unlike a method change for capitalization, which locks you into an approach for a period of years, this election can be made on a year-by-year basis for a portion of the R&D expense pool, giving companies the ability to manage the timing of deductions based on their financial needs each year.
Why this matters in practice:
Deferring some deductions into higher-income years — where they offset real tax liability — can be more valuable than taking large deductions in years when there is no income to offset, and limitations on net operating usage (80% of taxable income in the year utilized).
Managing deduction timing in pre-exit years can help smooth the income picture and potentially improve how the company’s tax position reads to an acquirer or in a public filing.
This annual election may offer a way to selectively capitalize specific costs in years where that makes sense, sitting alongside the primary method change election.
A gray area worth flagging
How this annual 10-year election interacts with the new OBBBA framework is an area where guidance is still developing. The IRS and Treasury have not yet issued comprehensive final regulations on how these tools work together under the new rules. The general planning logic is sound, but the specific mechanics should be confirmed with your advisor as guidance evolves.
One more credit interaction to be aware of
Companies claiming the R&D tax credits should be aware of an important coordination rule — OBBBA closed the loop on full gross R&D credit claim and full R&D cost deduction if 174 amortization exceeded the credit claim. Going forward if you claim the full gross amount of the research credit, taxpayers generally must reduce your R&D cost deduction by a corresponding amount. There is an election under 280C to take a slightly reduced credit in exchange for preserving the full deduction. This trade-off affects the net value of both the credit and the deduction, and it should be carefully evaluated as part of any planning conversation that involves both.
Ownership changes, loss limitations and the strategic value of capitalized costs
For R&D-stage companies approaching profitability or potential exit, the interaction between ownership-change rules, accumulated losses, tax credits, and capitalized R&D costs is often overlooked. Getting the strategy right before a financing round or acquisition can preserve significant tax value — while getting it wrong can result in permanently lost dollars.
When financing rounds create tax complications
The tax code under IRC Sections 382 and 383 includes rules that limit a company’s ability to use accumulated losses and certain credits after a significant shift in ownership. When investors collectively acquire a large enough ownership stake over a rolling multiyear period, the company’s ability to utilize previously accumulated losses becomes subject to an annual cap. For early-stage companies that have raised multiple financing rounds, this threshold is frequently triggered — sometimes without founders even realizing it.
The annual cap on loss utilization is tied to the fair market value of the company at the time of the ownership shift and a published IRS interest rate. For early-stage companies experiencing a significant financing event, the cap can be quite low — meaning a significant portion of accumulated losses may only be usable at a trickle, or in the worst case, expire before they can be used at all.
Tax credits are subject to a related set of rules that operate similarly, though the mechanics differ from loss limitations.
Why capitalized R&D costs behave differently
This is where the choice to capitalize R&D costs becomes a strategic decision rather than a simple accounting preference. R&D costs that are capitalized and then amortized over time do not create the types of tax attributes that are subject to ownership-change limitations under Sections 382 and 383. Instead, they generate future deductions that can reduce taxable income directly in the year they are taken — without the same restrictions that apply to accumulated losses.
This distinction matters a lot for companies that expect to raise additional capital (triggering ownership change rules) before it becomes profitable. Capitalized costs continue to generate deductions in profitable, post-change years without the annual cap restrictions that apply to prior accumulated losses. The trade-off is timing — you defer the deduction rather than taking it today — but for companies with a clear path to both additional financing and eventual profitability or exit, that trade-off can be a net positive.
- Capitalized costs create deductions that are not subject to ownership change limitations. They reduce taxable income directly in the year taken — an uncapped, above-the-line reduction that is fundamentally different from a loss carryforward, until it is eventually amortized into that loss carryforward, therefore extending the life of those deductions.
- Capitalization extends the life of the deduction into years when it is most useful. A company that expenses today and then go through a significant financing event may find that much of the benefit of those deductions is trapped or lost. Capitalized costs continue generating amortization deductions in profitable years, unrestricted.
- Capitalized costs can carry strategic value in a transaction. Unamortized R&D costs on the balance sheet may be treated favorably in certain deal structures, either stepping up in value or carrying over to the acquirer without the same limitations that apply to accumulated losses.
Not all tax attributes are created equal
Many founders assume that accumulated losses, tax credits, and amortization deductions are roughly equivalent planning tools. They are not. Understanding the differences is important for building a tax strategy that actually works when income arrives.
Under current Federal tax law, losses generated in recent years can only offset a portion of taxable income in any given year — not all of it. Meaning even if you have a large pool of prior losses, at least some portion of any profitable year will be taxable regardless. Layer on ownership change limitations, the usable amount can be reduced further.
Credits are valuable because they reduce the tax bill directly. However, they can only be used when the company has a tax liability to offset and come with their own limitations — especially after ownership changes.
For early-stage companies that don’t yet pay income tax, the payroll tax credit election offers a way to access credit value sooner, but eligibility requirements must be met.
Amortization deductions reduce taxable income directly and are not subject to the annual percentage cap that applies to accumulated losses. They also generally avoid the ownership-change limitation rules in the same way. Because amortization reduces the income base before the other limitations apply, its timing advantage can make it the most reliable of the three tools once the company becomes profitable.
A simplified illustration
Imagine a biotech company with significant accumulated losses and credits that raises a large financing round, triggering ownership change rules at a time when the company's value is still relatively modest. The annual cap on usable losses ends up being small. The company then closes a licensing deal generating substantial taxable income. Without any capitalized R&D, a large portion of that income is taxable. With capitalized R&D generating annual amortization deductions, taxable income is reduced dollar-for-dollar before the loss limitations even apply. The amortization is simply worth more in that scenario than an equivalent amount of accumulated losses.
State taxes: Don’t assume federal treatment carries through
One of the most frequently overlooked dimensions of federal R&D tax changes is what happens at the state level. States do not automatically follow federal tax law changes, and the pace at which they conform to major new legislation varies widely.
What this means practically
A state that has not conformed to the new federal framework may still require companies to follow older capitalization rules — meaning your state taxable income could look very different from your federal taxable income in the same year, creating two separate tax calculations to manage.
Key takeaway on state taxes
Do not assume a favorable federal R&D treatment translates automatically to the same benefit at the state level — or that a nonconforming state is actually a problem. The answer is almost always “it depends,” and the only way to know is to check
The bottom line
The new R&D cost rules are a significant improvement for most tech and life science companies compared to recent years. For early-stage companies, the ability to once again expense R&D costs as incurred — when properly elected — is a welcome shift. However, the planning opportunity extends far beyond choosing a default treatment.
The real value comes from understanding how the pieces fit together: how the method change commitment interacts with your financial projections, how accumulated losses and credits will actually behave when income arrives, how ownership changes affect your tax attributes and how state rules may diverge from federal. These are not purely technical questions. They have direct implications for cash taxes, exit value and investor diligence.
The best time to build your R&D tax strategy is before you need it. If you have questions on how this may impact your tax situation, please contact your Baker Tilly tax advisor.
