Tax Incentives for Growth in the One Big Beautiful Bill: QBI, QSBS, and R&D Expensing Explained

On July 4, President Trump signed the One Big Beautiful Bill (OBBB) into law, introducing a wide range of changes to the tax code and various government spending initiatives. To help make sense of what this means for you, we’ll be breaking down the key provisions and their implications in a series of blog posts.

This article explores how the OBBB supports business growth through three key provisions: QBI, QSBS, and R&D expensing. Each provision presents new opportunities for tax savings, strategic planning, and long-term investment.

Leveraging the Qualified Business Income (QBI) Deduction

The QBI deduction allows certain owners of sole proprietorships and pass-through entities (partnerships and S corporations) to deduct up to 20% of qualified business income from taxable income. Originally introduced in 2018 with a set expiration date, the deduction was modified in several ways under the OBBB. Most notably, it is now permanent, eliminating the sunset provision and providing long-term certainty for multi-year tax planning.

Key Updates Under OBBB:

  • Permanent 20% deduction: No expiration means more predictable tax planning.
  • Expanded phase-out thresholds: Higher income earners can now qualify for partial deductions.
  • Expanded phase-in for SSTBs: The OBBB increases the income limits for service businesses to qualify for the QBI deduction. This means more businesses in fields like consulting, healthcare, and financial services may now get at least a partial tax break.
  • New $400 minimum deduction: Active small business owners earning at least $1,000 of qualified business income annually receive a guaranteed QBI benefit, even if the standard 20% deduction is less than $400.

Strategic Considerations:

  • Entity choice: Reevaluate whether pass-through taxation is more beneficial than C corporation status. 
  • Income planning: High earners may benefit from timing income, deferring compensation, or increasing retirement contributions to stay within favorable thresholds. 
  • Material participation: Passive owners may want to meet participation standards to qualify for the new minimum deduction. 
  • Entity aggregation: Owners of multiple pass-through entities should consider grouping them to optimize QBI by pooling wages and property basis.

Enhancing Growth Through Qualified Small Business Stock (QSBS) Exclusion 

Section 1202 allows noncorporate taxpayers to exclude a percentage of the capital gain generated from the sale of QSBS. Historically, QSBS had to be held for 5 years to qualify for a gain exclusion, and the QSBS gain exclusion was limited to the lesser of $10 million per shareholder or 10 times their investment amount (subject to asset basis rules). Additionally, there was a $50 million aggregate gross asset limitation for a corporation’s stock to qualify as QSBS.

OBBB Expands and Improves QSBS Benefits:

  • Tiered gain exclusions for stock issued after July 4, 2025:
    • 50% exclusion if stock held for 3 years
    • 75% exclusion if stock held for 4 years
    • 100% exclusion if stock held for 5 or more years
    • The new tiered exclusion offers more flexibility and liquidity for investors.
  • Higher exclusion cap:
    • Raised from $10 million to $15 million, with inflation adjustments starting after 2026.
  • Expanded eligibility:
    • The gross asset limit increased from $50 million to $75 million for stock issued after July 4, 2025, allowing more midsize and growth-stage companies to issue QSBS.

Strategic Considerations:

  • Entity conversion: Partnerships or LLCs nearing a funding round may benefit from converting to a C Corporation to offer QSBS.
  • Investor appeal: Tax-free or reduced-tax gains can attract investors who might otherwise demand higher returns.
  • Exit planning: The new 3-, 4-, and 5-year milestones create more options for timing mergers, acquisitions, or recapitalizations.
  • Newly qualified companies: Businesses previously excluded due to asset limits may now raise capital under more favorable conditions.

Restoring R&D Expensing

Prior to OBBB, businesses were required to amortize domestic R&D expenses over five years, delaying deductions and straining cash flow—especially for startups and innovation-driven firms. The OBBB reverses this, allowing immediate expensing of domestic R&D costs starting with tax years beginning after December 31, 2024.

Key changes under OBBB:

  • Immediate expensing restored for domestic R&D, aligning tax treatment with the fast pace of innovation.
  • Small businesses (average gross receipts ≤ $31M over the past 3 years for the first taxable year beginning after December 31, 2024) can:
    • Amend 2022–2024 returns to claim deductions or take a “catch-up” deduction in 2025 or spread it ratably across 2025–2026.
  • Large businesses cannot amend past returns but may accelerate remaining amortization under the new rules by deducting any remaining unamortized amount of R&D expenses incurred in 2022-2024 as a deduction in 2025 or spread it ratably across 2025 – 2026.
  • Foreign R&D remains subject to a 15-year amortization period, reinforcing the bill’s focus on U.S.-based innovation.
  • Alternatively, businesses can make no changes and continue to amortize R&D expenses at 5 years.

Strategic Considerations:

  • Cash flow boost: Immediate deductions improve liquidity and support reinvestment in growth.
  • Budgeting clarity: Startups gain predictability, making it easier to justify upfront R&D spending.
  • Refund potential: Small businesses should weigh the administrative effort of amending returns vs. the value of retroactive refunds.
  • Acceleration planning: Larger firms must manage the transition from amortization to expensing to optimize tax outcomes.
  • Ownership changes: Small businesses should keep in mind of any ownership changes during 2022 – 2026 when deciding on amending or taking the remaining deduction in 2025 – 2026.

Coordinating QBI, QSBS, and R&D to Drive Growth

Together, QBI, QSBS, and R&D expensing create a strategic framework for maximizing tax efficiency and investment appeal. Businesses should consider how these incentives align with their entity structure, growth trajectory, and funding plans. Multi-year tax modeling is essential for businesses aiming to fully leverage these incentives, especially those planning for rapid growth, funding rounds, or liquidity events.

Whether you are a small business exploring entity formation or a larger enterprise weighing the costs and benefits of various tax structures, understanding these provisions can be critical for maximizing profitability and shareholder value.

HTB’s tax professionals are here to help you make the most of these opportunities while staying compliant with IRS and state rules. We’ll continue to share insights on the newly enacted OBBB in the coming weeks, so stay tuned. In the meantime, please don’t hesitate to reach out with any specific questions — we’re here to help you navigate these changes with confidence.

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