The recently passed One Beautiful Bill Act (OBBA) includes meaningful updates for startups. More IRS guidance is expected, but below changes stand out right away:
- The return of full domestic R&D expensing, beginning in tax year 2025
- A tiered structure for Qualified Small Business Stock (QSBS) exclusions based on holding period
- 100% bonus depreciation for most qualified property
Let’s break down what these changes mean for founders.
1. R&D Deduction Rules Are Changing, Again
One of the biggest startup tax headaches of the past few years has been the amortization requirement for R&D expenses under Section 174. OBBA brings relief, but not right away, and only for certain R&D expenses.
Starting with the 2025 tax year, U.S.-based R&D expenses can once again be fully deducted in the year incurred. That’s a major win for startups that invest heavily in product development and innovation.
However, this change does not apply until after the 2024 tax year, so startups will still need to capitalize and amortize their 2024 domestic and international R&D expenses. That means potentially higher taxable income and tax bills in 2024, just like in 2022 and 2023.
There is a notable exception:
Startups with average gross receipts of $31 million or less may amend prior-year returns (2022–2024) to retroactively expense domestic R&D and potentially reclaim overpaid taxes. This could be especially valuable for startups that were unexpectedly profitable due to Section 174 capitalization.
Options for qualifying businesses include:
- Amending past returns (2022-2024) to retroactively deduct R&D expenses and claim a refund of any overpaid tax. (An election must be made within one year of the bill’s enactment (7/4/2025))
- Waiting until 2025, then deducting any remaining unamortized amounts all at once, or spreading the deduction across 2025 and 2026.
Large businesses don’t have the option to amend prior years. But they can accelerate deductions for unamortized R&D costs starting in 2025.
Importantly, know that this change only applies to US-domestic R&D. All R&D performed outside the US must still be capitalized and amortized over 15 years. As a result, startups must still separate domestic and internationally performed R&D expenses and should plan their tax expectations appropriately.
👉 Strategy tip: Was your startup profitable in 2024 due to amortized R&D expenses? If so, consider delaying your 2024 tax filing until closer to the 10/15 extended deadline. More guidance may emerge that could affect your best path forward.
2. QSBS Gets More Flexible
Startups and investors alike have long valued the 100% exclusion on Qualified Small Business Stock (QSBS) gains after a 5-year holding period. OBBA now introduces two new tiers for earlier exits:
- 50% exclusion if shares are held for at least 3 years
- 75% exclusion if held for at least 4 years
The 100% exclusion still applies for shares held 5 years or more.
This gives founders and early employees more options when planning liquidity events. The change applies to newly acquired stock on or after July 4, 2025, and it may influence decisions about timing secondary sales or acquisitions.
Another positive update:
The gross value cap to qualify for QSBS increases from $50 million to $75 million, potentially expanding eligibility for growing startups.
3. Bonus Depreciation Restored
The OBBBA has permanently reinstated 100% bonus depreciation for certain qualified property that is placed in service after January 19, 2025. This applies to tangible property with a class life of 20 years or less, consistent with prior bonus depreciation rules. This means immediate tax deduction of capital investments, instead of depreciation over years.
Additionally, the law introduces bonus depreciation for applicable qualified production property acquired by the taxpayer between January 19, 2025, and January 1, 2029.
Final Thoughts
The OBBA brings promising updates, but like many tax changes, it introduces complexity and requires careful planning.
It’s a good time to check in with your tax advisor if your startup is:
- Profitable and investing in R&D
- Navigating a liquidity event or thinking about QSBS
- Unsure about how to handle past or upcoming R&D deductions
These changes could significantly impact your tax liability, cash position, and planning strategy.
Need help?
Burkland’s startup tax team is already helping startups interpret OBBA and prepare strategies for 2024 and beyond. Contact us today to learn more about how we can support your startup’s financial success.