What the One Big Beautiful Bill Act Means for Startups

The recent passage of H.R. 1, commonly referred to as the One Big Beautiful Bill Act (OBBBA), will present exciting opportunities, as well as challenges, for technology and life sciences startups. Some changes were retroactive, some were effective upon passage, and some do not go into effect until after December 31, 2025, further adding to the tax complexity facing startups. Provisions such as the creation of a new IRC Sec. 174A, the revival of several expired business breaks, and favorable changes to IRC Sec. 1202 (Qualified Small Business Stock) will all benefit startups, provided they meet all the requirements.

Revival of Research and Development Expensing

The Tax Cuts and Jobs Act (TCJA) eliminated businesses’ ability to immediately deduct their research and development (R&D) expenditures in the year in which they are incurred for tax years beginning after December 31, 2021. Instead, businesses have been required to capitalize these expenses and amortize them over five years (if domestic expenses) or 15 years (if foreign expenses). The OBBBA restores the immediate deduction for domestic R&D expenses under new IRC Sec. 174A, helping early-stage companies preserve cash. (Foreign expenses must still be amortized over 15 years).

The bill also gives small businesses the opportunity to file amended returns for 2022, 2023, and 2024 to claim their R&D expenses retroactively. Businesses must meet the definition of “small business” for the 2025 tax year, meaning their average annual gross receipts over 2022, 2023, and 2024 cannot exceed $31 million. Additionally, all businesses are eligible to deduct unamortized R&D expenses over either 1 or 2 years, beginning in 2025.

Planning: For startups, the benefit of this change cannot be overstated. Many startups experienced significant cash-flow issues and high tax bills due to their inability to deduct these expenses immediately. The ability to amend prior year returns for small businesses could be beneficial for startups as well. Still, they will need to carefully consider the overall impact before making this election. In some cases, small businesses may have a better result by deducting their unamortized expenses in 2025 or over 2025 and 2026, as they will have to either reduce the amount of the R&D credit they received for those years or take the reduced credit if they amend.

Extended Favorable Expensing Provisions

The TCJA introduced 100% bonus depreciation but contained a phase-out schedule that took effect in 2022. For 2025, the available bonus depreciation amount was 40%. The OBBBA permanently revived 100% bonus depreciation for available for assets acquired after January 19, 2025.

Additionally, the OBBBA increased the amounts a taxpayer can immediately expense under IRC Sec. 179. The limit is increased to $2.5 million (up from $1 million), with the threshold increased to $4 million (from $2.5 million). These amounts are increased annually for inflation.

Planning: The reintroduction of bonus depreciation and the increase in IRC Sec. 179 should present startups with another opportunity to increase their cash flow. For companies in states that do not conform to bonus depreciation, the increase in Sec. 179 could be particularly useful. Additionally, higher expensing limits offer additional savings on capital investments.

Revival of Preferable Interest Deduction Limitation 

Under IRC Sec. 163(j), large businesses (those will average annual gross receipts over $31 million) are limited in how much of their business interest they can deduct. Businesses can only deduct interest expenses up to 30% of their Adjusted Taxable Income (ATI). Prior to 2022, businesses calculated their ATI using earnings before interest, taxes, depreciation, and amortization (EBITDA). Since 2022, businesses have been limited to using earnings before interest and taxes, which for some businesses dramatically reduced their ATI and therefore the amount of interest they could deduct. The OBBBA restores the use of EBITDA to determine ATI for tax years beginning after December 31, 2024.

Planning: Startups often take on significant debt while establishing their businesses. This change will allow these startups to once again deduct more of the interest they pay on that debt, further increasing cash flow.

Enhanced Qualified Small Business Stock Rules

The Qualified Small Business Stock (QSBS) exclusion under IRC Sec. 1202 allows investors in C corporations to exclude up to the greater of $10 million or 10 times their basis upon the sale of the QSBS. To qualify, the investor must have held the stock for over five years, and the company must not have had assets (or a tax basis) in excess of $50 million.

The OBBBA enhances the QSBS exclusion in multiple ways for stock issued after July 4, 2025. An investor can now exclude the greater of $15 million or 10 times their basis, and businesses must now not exceed assets of $75 million. For the first time since its inception, these amounts will be adjusted for inflation each year, starting in 2027. Additionally, the OBBBA creates a tiered exclusion system based on different holding periods, as follows:

Planning: The change will be very beneficial for startups seeking investors, as it makes investing even more attractive. Investors will be able to exclude more of their gain, and startups will likely be able to issue QSBS for a longer time with the increase in gross assets. Additionally, startups whose stock was previously not eligible for QSBS may qualify again under the increased gross asset amount. The introduction of tiered holding periods may encourage more investors as well, as they will no longer be locked in for five years to exclude any gain. The holding period may make early exits more attractive for certain investors as well.

Carried Interest 

Despite calls from the president to eliminate the so-called “carried interest loophole,” no provision was included in any version of the bill. The holding period for preferential tax treatment remains at 3 years, ensuring continued favorable tax rates for carried interest on investments held for greater than 3 years. This means the bill retains another incentive for outside funds to invest in startups.

Planning: The lack of provisions eliminating the favorable treatment of carried interest is a good outcome for startups. However, businesses should carefully monitor this provision, as it continues to be a potential target in future legislation.

Startups should familiarize themselves with the provisions that may impact them to plan for 2025 and beyond adequately. If you have questions about how the OBBBA will affect you and your business, contact us below.