by Dan O’Connor, Excendio Advisors
Introduction
For IT founders and owners, R&D isn’t just an expense line — it’s the engine that fuels product differentiation, customer stickiness, and long-term market relevance. The way R&D is treated on the balance sheet and in the tax code directly affects how outside investors, lenders, and acquirers perceive the scalability of the business.
Until recently, R&D was often viewed narrowly — either as a compliance issue under §174 or as a budget item to be defended during board reviews. But with the passage of the One Big Beautiful Bill Act (OBBBA), the landscape has shifted dramatically. Immediate expensing under §174A is more than a technical correction; it is a valuation catalyst.
This shift matters because buyers don’t just underwrite numbers — they underwrite stories. A company able to demonstrate that every dollar spent on innovation flows directly into near-term EBITDA strength and future growth tells a fundamentally stronger story in diligence. The opportunity is not simply to “expense faster” — it is to reframe R&D as a signal of foresight, governance maturity, and reinvestment capacity, which translates into higher multiples and faster deal velocity.
OBBBA’s Impact on R&D
Before OBBBA, the Tax Cuts and Jobs Act (TCJA) created significant friction for growth-oriented companies. Domestic R&D costs had to be amortized over five years, while foreign R&D stretched over fifteen years. In practice, this meant:
- Cash and tax mismatch. Companies paid for R&D upfront, but deductions were spread out over time, weakening reported profitability.
- Artificial EBITDA compression. Margins looked thinner than reality, often by several hundred basis points.
- Negative perception in diligence. Buyers, lenders, and investors saw innovation-heavy businesses as less scalable, even if underlying economics were strong.
For software, IT services, and emerging tech firms, this distortion was more than accounting — it was a valuation handicap. Companies were forced to spend valuable time in diligence explaining away the gap, weakening their negotiating leverage.
OBBBA corrected this distortion by reinstating immediate expensing under §174A, effectively restoring alignment between innovation spending and financial optics. The benefits are threefold:
- Financial clarity. Immediate deductions boost EBITDA optics and cash flow, creating room for reinvestment without compromising valuation.
- Governance signaling. Companies that proactively adopt §174A show foresight, tax discipline, and operational maturity — qualities acquirers often pay a premium for.
- Negotiation advantage. Instead of explaining compressed margins, founders can now highlight reinvestment capacity and capital efficiency as strategic strengths.
The broader implication is clear: under OBBBA, R&D is not only a growth driver — it becomes a valuation accelerator and governance differentiator.
R&D Expensing — §174
R&D expensing has always been a lever in the tax code, but OBBBA magnifies its impact. Three dimensions stand out:
- Immediate deduction vs. amortization.
Under TCJA, $5M of R&D might only yield a $1M deduction in year one, artificially reducing reported profitability. Under OBBBA, the full $5M can be deducted immediately, improving EBITDA by 200–300 basis points in some industries. This is a tangible swing that buyers notice. - Retroactive claims.
Companies can revisit tax years 2022–2024, amend returns, and potentially unlock millions in refunds. For founder-led businesses, that’s not just a tax win — it’s non-dilutive liquidity to fund growth initiatives without tapping debt or equity markets. - Governance and storytelling.
How a company positions R&D in board decks, investor presentations, and diligence materials matters. Using §174A strategically signals foresight: “We don’t just comply — we optimize.” This narrative resonates with private equity buyers, strategic acquirers, and even lenders who see stronger coverage ratios.
In other words, §174 under OBBBA is not just about moving numbers — it’s about moving perceptions.
Case Example: Valuation Impact Modeling
Here’s how these mechanics translate directly into valuation impact.
Consider a mid-sized software company investing $5M annually in domestic R&D.
- Pre-OBBBA:
Under the old TCJA rules, only $1M of that spend could be deducted each year due to mandatory five-year amortization. This created an artificial drag on profitability, with EBITDA appearing weaker than it truly was. Investors saw compressed margins, slower cash recovery, and a business that looked less scalable in the near term. As a result, buyers applied a lower EBITDA multiple (around 10×), valuing the business at roughly $150M. - Post-OBBBA (Immediate Expensing):
With §174A in place, the full $5M can be deducted in the same year. This restores tax efficiency, immediately boosts cash flow, and improves EBITDA optics by 200–300 basis points. Buyers perceive the company as more profitable and better positioned to reinvest in growth. In diligence, this can translate into an extra full turn of EBITDA on valuation, lifting the company’s worth by $15–20M. - Retroactive Relief Opportunity:
If the company amends prior-year returns (2022–2024), it could recover $6M in tax refunds. This creates additional liquidity to fund hiring, product launches, or market expansion. Importantly, it also signals governance maturity and tax-savvy discipline, traits that buyers reward with premium pricing.
Bottom line: OBBBA doesn’t just change accounting—it changes the storyline. Companies that embrace §174A and present it strategically will see higher multiples, faster exits, and stronger investor confidence.
Strategic Opportunities for IT Founders and Owners
The passage of OBBBA turns R&D expensing into a playbook for valuation growth. Founders who treat §174A as a strategic lever — rather than just a tax fix — can unlock significant advantages:
- Valuation leverage. Every turn of EBITDA multiple matters. By reframing R&D as immediately accretive, founders can shift valuation by tens of millions. For instance, a company growing at 20% annually that demonstrates strong EBITDA optics can justify higher revenue and profit multiples simultaneously — a rare dual benefit.
- Negotiating strength. Private equity buyers and strategic acquirers reward discipline. Clean adoption of §174A, paired with clear documentation of retroactive claims and governance processes, tells a story of foresight and professionalism. Instead of answering diligence questions defensively, founders can lean forward and demonstrate that their systems exceed buyer expectations.
- Exit readiness. Many founder-led firms underestimate how quickly valuation gaps surface during sale processes. With §174A positioned correctly, R&D spend transforms from a “margin drag” into a scalability signal. That difference can make the business appear acquisition-ready years sooner than expected.
- Capital allocation clarity. Retroactive refunds are not just a one-time windfall — they are a chance to reframe strategy. Companies can use the liquidity to accelerate go-to-market expansion, seed new product development, or invest in AI-driven efficiencies. Deploying this capital visibly and strategically strengthens both growth trajectory and buyer perception.
- Market differentiation. In a crowded IT and software landscape, governance maturity is often the tiebreaker in valuation. Two companies may show similar growth rates, but the one that integrates §174A into its financial story will almost always be seen as lower risk and higher value.
In short, OBBBA gives IT founders a unique opportunity: to turn R&D from a misunderstood cost center into a premium-pricing narrative that elevates valuation, strengthens negotiations, and accelerates exits.
Call to Action
R&D should be seen as more than a budget line — it is a strategic signal. For buyers, understanding whether a company’s governance and tax readiness represent foresight and discipline, or gaps and risks, can mean the difference between protecting value and overpaying.
👉 Connect with Excendio for a strategic conversation on OBBBA diligence and R&D strategy. We’ll help you frame the right questions, sharpen your perspective, and approach negotiations with clarity about how governance maturity impacts valuation and deal dynamics.
Excendio ensures that buyers view R&D under OBBBA not as a checklist, but as a strategic filter — one that separates well-prepared companies worth paying for from governance gaps that weaken valuation.