Executive Summary

• OBBB restores immediate domestic R&D expensing and 100% bonus depreciation, lowering the cost of US innovation.
• R&D is the creation of intangible assets (patents, software, data, know-how).
• The Paradox: OBBB promotes the creation of intangible assets but limits their recognition as many of the costs (e.g. data and know-how) are expensed through the P&L and not reflected on the balance sheet. By contrast, capital assets remain visible in financial statements even if they are written off for tax.
• The Implication: financial statements drive management attention; off balance intangible sheet assets tend to be overlooked in strategy, operations, transactions, and risk — yet are the outputs of R&D and among the most important growth assets belonging to a company.
• Leaders must redouble efforts to actively identify, measure, and manage intangible assets.

Introduction

On July 4, 2025, U.S. President Donald Trump enacted the One Big Beautiful Bill (“OBBB”), a comprehensive law that transforms major sectors of the U.S. economy, including tax policy, defense spending, social programs, energy, and immigration. Although OBBB covers many topics, its impact on how businesses handle Research and Development (R&D) taxes is particularly significant.

Definition and Treatment of R&D

Under U.S. GAAP (Generally Accepted Accounting Principles), ASC 730-10-20 defines Research and Development (R&D) as activities intended to discover new knowledge that will lead to new or improved products, processes, or techniques. Examples include laboratory research, conceptual formulation, design, and prototype testing. Activities such as routine or periodic design changes, quality control, troubleshooting, and market research are excluded.

In accordance with ASC 730-10-25-1, R&D costs are generally expensed as incurred, except for certain items—such as materials, equipment, or facilities with alternative future use, and software development costs that are scoped into other standards (ASC 985-20 or ASC 35-40), which may be capitalized under their respective guidance.

From a tax perspective, IRC Section 174 of the Internal Revenue Code governs the treatment of R&D expenditures. The Tax Cuts and Jobs Act of 2017 (Pub. L. 115-97) required capitalization and amortization of domestic R&D costs over five years and foreign R&D over fifteen years beginning in tax years after December 31, 2021 and before January 1, 2025. The One Big Beautiful Bill (OBBB) repeals that rule through the addition of IRC Section 174A, restoring full and immediate deductibility of qualifying domestic R&D expenditures for tax years beginning after December 31, 2024.  Nondomestic R&D is still required to follow a fifteen-year amortization period.

Software Development and Capitalization

Software development represents a special case within the broader R&D landscape. Depending on its use, software may fall under ASC 350-40 for internal business use or ASC 985-20 for software to be sold, leased, or licensed. Capitalization is permitted once a project reaches technological feasibility or enters the application-development phase. In practice, however, many companies expense most software costs because agile and iterative development make it difficult to delineate capitalization thresholds, and auditors often take a conservative interpretation. As a result, only a small fraction — typically 10 to 30 percent — of total software investment is capitalized, even though software frequently becomes one of a company’s most durable and scalable intangible assets.

Together at a practical level, these provisions mean that while R&D spending generates economically significant intangible assets — such as software, data, and know-how — those assets are often absent from balance sheets even as they underpin long-term enterprise value.

R&D as Intangible Asset Creation — and the Visibility Gap

R&D is not just a budget line. It represents the process by which firms employ smart people to do smart things — creating intangible assets such as software, hardware, data, network effects, regulatory approvals, and trade secrets. This is a non-trivial amount: intangible assets account for roughly 90% of the value of the entire S&P 500, and those 500 firms are responsible for approximately 55% of all U.S. R&D expenditure.

The OBBB rewrites how domestic R&D activities are treated for tax purposes, making it cheaper to conduct. But the combination of OBBB with modern accounting rules intensifies an already serious issue: a large portion of the very assets the legislation incentivizes are expensed away through the profit and loss statement and largely unrecorded on the balance sheet, leaving them essentially absent from financial statements. And because management attention is driven by what appears in financial statements, the absence of internally developed intangible assets creates a strong bias to under-recognize and under-manage them.

This article examines OBBB’s new rules on R&D, the incentives they create, and the leadership responsibility that follows from the paradox of incentivizing asset creation while simultaneously accounting standards encourage companies to ignore those very assets.

OBBB and R&D Expenditures

OBBB reshapes the tax treatment of R&D through several major reforms. Prior to its enactment, the Tax Cuts and Jobs Act of 2017 (“TCJA”) required US taxpayers to capitalize and amortize domestic R&D expenditures over a five-year period beginning in tax years after December 31, 2021 and before January 1, 2025. OBBB’s IRC Section 174A reverses that approach by restoring immediate expensing of domestic R&D costs incurred in tax years beginning after December 31, 2024.

Beginning in 2025, companies may deduct the entire amount of qualifying domestic R&D expenditures in the year they are incurred. Alternatively, taxpayers can elect to capitalize and amortize these costs over a self-selected period of not less than 60 months, beginning in the month when the resulting R&D benefits are first realized. Alternatively, taxpayers can elect an amount of domestic R&D to amortize over ten years under IRC Section 59(e).

OBBB also affords taxpayers favorable transition options to recoup previously capitalized domestic R&D expenditures. IRC Section 174A allows accelerated deductions of unamortized domestic R&D costs from 2022–2024 over one or two taxable years for the first tax year beginning after December 31, 2024, treated as a change in accounting method. Small businesses, those with average annual gross receipts of $31 million or less, benefit even further, as they may elect retroactive application of IRC Section 174A for tax years beginning after December 31, 2021. This requires filing amended returns no later than July 4, 2026.

In parallel, OBBB reinstates 100% bonus depreciation for qualifying capital investments, allowing businesses to deduct the full cost of eligible equipment, technology infrastructure, and related assets in the year they are placed into service. Together, these provisions significantly lower the indirect cost of both research activities and the capital base needed to scale them, creating one of the most favorable tax environments for innovation in recent history.

Incentivization of Domestic R&D

OBBB’s R&D reforms materially alter the economics of innovation. By restoring immediate expensing of domestic R&D and reinstating bonus depreciation, OBBB accelerates tax deductions, improves cash flow, and strengthens the financial case for U.S.-based innovation.

For many companies, the immediate impact of the ability to deduct current year domestic R&D and accelerate unamortized TCJA capitalized R&D is a reduction in current-year tax liability, releasing liquidity that would otherwise have been tied up in tax payments. That capital can be redeployed into further R&D programs, capital investments, or other strategic priorities without relying on external financing. The provisions for retroactive application allow certain eligible companies to amend prior filings, reducing taxable income in earlier years and in some cases generating refunds — an especially valuable tool for small and emerging companies.

By applying these incentives only to domestic R&D (while leaving the 15-year amortization requirement for foreign R&D unchanged), OBBB also strengthens the rationale for conducting innovation within the United States. In short, the legislation not only lowers the cost of R&D but also reshapes the geographic calculus of where companies locate their innovation activities, reinforcing US competitiveness.

R&D as Intangible Asset Creation — and the Accounting Paradox

While OBBB reduces the after-tax cost of R&D, it is critical to recognize what R&D actually represents: the creation of intangible assets. Dollars spent on employing scientists, engineers, and developers to solve complex problems produce proprietary technologies, algorithms, datasets, and know-how. These outputs are assets in the truest economic sense—they drive future revenue and are central to competitive advantage and enterprise value.

Yet under U.S. GAAP, these internally generated intangible assets are almost never recognized on the balance sheet. Instead, they are expensed immediately through the income statement. OBBB, by encouraging additional R&D investment, increases the volume of activity subject to this accounting treatment. As a result, more intangible assets will be created, but most will not appear in financial statements at all — they will be treated as transient operating expenses rather than long-lived strategic assets.

Importantly, this blind spot applies to R&D, not to all assets. Capital assets—like equipment or capitalized software—still appear on the balance sheet and are depreciated or amortized under GAAP/IFRS, even though their full cost may be deductible immediately for tax purposes under OBBB. The result is a divergence: tangible assets and capitalized intangible assets remain visible in financial reporting, while internally generated intangible assets (representing the majority of R&D spend) are, as outlined above, expensed away and are effectively never regarded as “assets” even though they are crucial contributors to enterprise financial performance.

This is the paradox. The U.S. government is incentivizing companies to create more of their most valuable assets, while accounting standards simultaneously lead to those same assets being largely ignored in financial reporting. Because leaders and boards are trained to manage companies through financial statements, what does not appear there tends to be overlooked — not only in strategy, but in operations, M&A, capital allocation, and risk management. Put simply: financial statements shape management attention. If intangible assets are invisible there, they risk being undervalued everywhere.

Consider the alternative: if a company were incentivized to build a new factory or purchase advanced physical machinery, management would be expected to identify, measure, and manage those physical assets, with boards and shareholders holding them accountable. Leaders who failed to manage such assets would be replaced or held liable to shareholders.  Yet when the assets are intangible, accounting rules render them largely invisible in financial statements.

Why Leadership Must Act

The consequence of this “invisibility” is that firms risk underutilizing their most valuable resources. As Peter Drucker famously said, “What gets measured, gets managed.” If intangible assets are not measured, they are at best likely to be underleveraged, and at worst mismanaged in ways that erode competitive advantage. Trade secrets and know how may leak to competitors, software may go under-protected, data assets may be siloed or left unmonetized, and approvals may be neglected.

OBBB thus presents both an opportunity and a challenge. It creates powerful incentives to conduct R&D — and therefore to generate more intangible assets—but it also reinforces the structural blind spot that leads management to overlook the very outputs of that R&D.

Left unaddressed, this blind spot has cascading effects: strategy that fails to recognize the company’s true sources of value, operations that under-resource asset protection, transactions that undervalue acquisitions or divestitures, and risk assessments that miss critical exposures.

Business leaders cannot rely on financial statements alone to tell them what assets they possess. They must put in place frameworks to systematically identify, protect, and leverage intangible assets as the core drivers of enterprise value. In effect, the leadership imperative is to do for intangible assets what generations of executives have naturally done for physical plants and equipment: manage them actively, strategically, and with accountability to shareholders.

Financing and Structural Reforms

It’s worth noting that OBBB also eases interest deductibility rules by excluding depreciation and amortization from Adjusted Taxable Income. This makes debt financing more attractive and indirectly supports intangible asset strategies, since companies can more readily fund large-scale R&D or acquire intangible-rich businesses. While secondary to the expensing provisions, this reform further lowers the effective cost of building and scaling intangible asset portfolios.

Conclusion

The One Big Beautiful Bill represents one of the most significant overhauls of U.S. tax policy for innovation in decades. By restoring immediate expensing for domestic R&D, reinstating bonus depreciation, and reforming interest deductibility, OBBB materially lowers the after-tax cost of innovation and strengthens corporate liquidity.

But the true significance lies beyond tax savings. OBBB incentivizes the large-scale creation of intangible assets that already account for the majority of enterprise value. At the same time, by encouraging their treatment as expenses rather than assets, it reinforces the accounting blind spots that have long led management to underappreciate and under-manage them.

Business leaders therefore face a dual responsibility. First, to take advantage of OBBB’s provisions to accelerate innovation and strengthen cash flow. Second, and more critically, to actively identify, measure, and manage the intangible assets produced by R&D with the same rigor applied to physical assets. Those firms that recognize intangible assets as the true output of innovation, and manage them accordingly, will be best positioned to turn OBBB’s tax incentives into lasting competitive advantage.