Private equity (PE) firms have become increasingly sophisticated at finding hidden sources of value during acquisitions, yet one opportunity continues to be overlooked in many transactions: research and development (R&D) tax incentives. Historically unclaimed R&D tax credits and newly favorable tax treatment of research expenditures can significantly improve deal economics, enhance cash flow, and create incremental value both before and after closing. With the restoration of immediate deductions for qualifying research expenses under the One Big Beautiful Bill Act (OBBBA), the financial impact of proactive R&D tax planning has become even more compelling. As a result, integrating R&D tax diligence into the transaction process is a strategic value creation initiative that can strengthen underwriting assumptions, support negotiations, and improve investment returns throughout the hold period.
New legislation
Recent legislative changes under the OBBBA have made R&D tax planning even more valuable in PE transactions. By restoring the immediate deduction for qualifying research expenses and reversing the capitalization requirement introduced in 2022, the legislation significantly enhances the tax benefits available to companies investing in innovation. These current deductions are available in addition to federal and state R&D tax credits, creating a powerful combination of incentives. Together, these benefits can improve deal economics, sharpen negotiation strategies, and accelerate near-term cash flow.
Pre-close value creation
R&D tax diligence can uncover significant hidden value by identifying historically unclaimed tax credits in PE acquisitions. During entity acquisitions, buyers often discover that prior owners never evaluated qualifying research activities or significantly under-claimed federal and state R&D tax credits. With appropriate diligence and substantiation, buyers may identify these missed opportunities and, in limited circumstances, claim them after closing. This can, in some cases, create an immediate source of incremental value.
Claiming these credits involves numerous tax and legal considerations, as well as possible IRS scrutiny. Because R&D tax credits can face rigorous IRS examination, qualifying activities must be supported by thorough documentation showing compliance with statutory and regulatory requirements. An R&D Credit Study provides the technical analysis and contemporaneous support needed to substantiate eligible research activities and defend claimed credits in the event of a federal or state tax audit.
Post-close value creation
The value of R&D tax planning extends well beyond the transaction close. While historical R&D tax credits generally don’t transfer to the buyer, acquisitions frequently generate new qualifying research activities that can create post-close tax benefits. Integration of the new business often involves new product development, software modernization, process improvements, engineering redesigns, and the assimilation of acquired technologies and operations. These activities may qualify for additional R&D tax credits and deductions, reducing post-acquisition tax liabilities while helping to offset the costs of integration and operational transformation. When incorporated into financial modeling during the diligence process, these tax benefits can shorten investment payback periods, improve internal rates of return (IRR), and enhance the overall value creation plan.
Strategic value
For PE sponsors focused on maximizing returns, R&D tax diligence should be viewed as a strategic component of the investment lifecycle rather than a standalone tax exercise. By evaluating both historical adoption and future qualifying activities, sponsors can transform innovation spending into a deliberate, tax-efficient capital allocation strategy that supports stronger deal execution and long-term portfolio performance.
About our authors
Jim Brandenburg, CPA, MST, possesses extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions, and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies. Jim.Brandenburg@sikich.com
Neil Keller, CPA, is Sikich’s tax lead for manufacturing, working closely with middle-market businesses on evolving tax regulations, business valuations, and cost segregation. He also supports clients in decision-making such as corporate entity structuring or M&A considerations. Neil.Keller@sikich.com
Phil Rosloniec, CPA, supports the tax planning and strategies of business owners in industries such as construction, professional services and engineering. With nearly two decades of experience in public accounting and at publicly traded companies, he brings a deep understanding of tax laws and compliance. Philip.Rosloniec@sikich.com
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