R&D Tax Break Restored: Businesses Can Immediately Deduct Research Costs Starting 2022

The aptly named American Innovation and Jobs Act is essentially a major tax incentive package aimed squarely at businesses that invest in research and development (R&D). If you run a company that spends money on developing new products, software, or processes, this bill is designed to give you a significant cash flow boost.

The Big Reversal: Immediate R&D Expensing is Back

For the past few years, businesses have been forced to treat their R&D costs like long-term investments, amortizing (or deducting) them slowly over five years. This bill, under Section 2, slams the brakes on that requirement and returns to the previous, more favorable rule: immediate expensing. This means that money spent on research or experiments related to your business can be fully deducted in the year it was spent. Think of a software startup: instead of waiting five years to fully deduct the salaries of the engineers building their new app, they can take the entire deduction right away. This change is retroactive, applying to tax years starting after December 31, 2021.

This immediate write-off is a huge deal for cash flow. It lowers taxable income immediately, which is critical for growing companies. The bill does offer a bit of flexibility: if you don't want the immediate deduction, you can elect to treat certain costs as “deferred expenses” and deduct them over a period of 60 months or more, which might be useful for highly specific accounting strategies. However, the law is clear that this benefit doesn't apply to costs related to land or mineral exploration, and the expenditures must be considered “reasonable.”

Bigger Bucks for Small Business R&D

Section 3 focuses on making the R&D tax credit much more accessible and valuable for new and small businesses. This is about putting cash directly back into the hands of innovators who might not have enough tax liability to use a standard credit.

First, the maximum amount of the research credit that a small business can get back as a refund is increasing dramatically. The current cap is $250,000, but this bill phases in an increase starting in 2025 at $500,000, and then gradually increasing to $750,000 by 2035. For a biotech startup or a manufacturing shop developing a new process, this higher refundable limit means a lot more working capital.

Second, the bill extends how long new businesses can utilize this refundable credit, moving the limit from five years to eight years. This recognizes that it often takes longer than half a decade for a startup to become profitable enough to use standard tax credits.

Third, the eligibility bar is being raised significantly. To qualify for this special treatment, a business previously needed gross receipts of $5 million or less. The new threshold is $15 million or less. This opens the door for a lot more mid-sized, growing companies to access these critical funds, starting in tax years after December 31, 2024.

The Fine Print: Balancing the Books

Section 4 also makes it easier for the newest startups to calculate their R&D tax credit, allowing them to use a more favorable 20% rate instead of the standard 14% in some cases. This is a technical change, but it means a bigger credit check.

Here’s the catch, though, and it’s an important one for tax professionals: Section 2 updates related rules to ensure that if you claim the R&D tax credit, you must reduce your deduction for R&D expenses by the amount of the credit claimed. You can’t double-dip by claiming the full deduction and the full credit on the same expenses. This is a common coordination rule, but it means that businesses need to carefully calculate whether the immediate deduction or the tax credit provides the greater overall benefit. For the US Treasury, these changes mean reduced tax revenue upfront due to the immediate deductions and increased outlays from the higher refundable credits, but the trade-off is intended to be increased innovation and job growth.