Tax law has a habit of changing faster than most MSPs can keep up with. Between the original Tax Cuts and Jobs Act (TCJA), years of temporary fixes, and now the One Big Beautiful Bill Act (OBBBA), it’s no surprise that many MSP owners feel unsure about what applies to them and what doesn’t when it’s time to claim deductions.
One of the most misunderstood (and often overlooked) opportunities is the R&D (Research and Development) tax credit. Many MSPs assume it’s meant for manufacturers, biotech companies, or large software firms.
In reality, modern MSP operations increasingly qualify, and under the OBBBA, R&D has become more valuable and easier to plan around than it’s been in years.
This article breaks down what changed, why MSPs should care, and how to think about R&D in a way that actually fits how service businesses operate.
Most managed service providers don’t think of themselves as “doing R&D.” They think of themselves as solving client problems, improving internal systems, and building scalable services. And that may be true.
But from a tax perspective, that distinction doesn’t matter as much as you might think.
The federal R&D tax credit is available to businesses that develop or improve products, processes, software, or systems using technical experimentation. For MSPs, that can include everything from internal tooling to security workflows to custom automation.
Unlike a deduction, which only reduces taxable income, the R&D tax credit reduces your tax bill dollar-for-dollar. And for smaller or early-stage MSPs, part of the credit can even be applied against payroll taxes, turning a paper benefit into tangible cash flow.
The One Big Beautiful Bill Act (OBBBA), signed in 2025, permanently restored full expensing for domestic R&D costs. That combination gives MSPs more predictability, more flexibility, and fewer unpleasant surprises at filing time.
At its core, the R&D tax credit rewards businesses for taking technical risks and investing in innovation.
It applies to qualified research expenses (QRE), which commonly include:
If you have questions about other qualifying research expenses, it’s helpful to know that the work must generally meet the IRS’s four-part test:
Overall, before the OBBBA, MSPs were forced to capitalize and amortize domestic R&D expenses over five years, which diluted the benefit and made planning harder. That rule disproportionately hurt service businesses with high payroll and software costs. The “Big Beautiful Bill” reversed that change.
What trips many MSPs up is confusing the R&D credit with the R&D deduction.
You can often take both, but the credit is usually more valuable. We will get into more specifics about this in the next section.
One reason the R&D tax incentive feels so confusing is that it’s actually two different benefits, governed by two different parts of the tax code:
The OBBBA touched both, but in very different ways.
The most impactful change for MSPs is tied to the R&D tax deduction, not the credit.
From 2022 through 2024, businesses were required to capitalize and amortize domestic R&D (also called R&E) expenses over five years, even if those expenses were primarily payroll and software costs. For MSPs, which tend to invest heavily in people, systems, and internal tooling, this created cash-flow strain and unexpected tax bills.
Beginning in 2025, the OBBBA restores immediate expensing for domestic R&D costs. That means qualifying R&D expenses can once again be fully deducted in the year they’re incurred, instead of being spread out over multiple years.
For MSPs, this directly impacts cash flow timing, taxable income in growth years, and the ability to invest in internal systems without a delayed tax benefit.
Imagine an MSP with $2.5 million in annual revenue that spends $300,000 in a year on internal system improvements, including engineer wages for automation projects, PSA customization, and security workflow development. Before the OBBBA, those domestic R&D costs had to be capitalized and deducted over five years, meaning only about $60,000 was deductible in the first year. The remaining $240,000 provided no immediate tax relief, even though the cash had already been spent. But under the OBBBA, that same MSP can deduct the full $300,000 in the year the costs are incurred, reducing taxable income immediately.
The R&D tax credit itself didn’t disappear under prior law, but it was harder to plan around. The OBBBA made the credit permanent, eliminating repeated sunset dates and last-minute extensions.
While the credit rules didn’t fundamentally change, this permanence matters for MSPs because it allows:
Unlike a deduction, the R&D tax credit reduces taxes dollar-for-dollar, and for qualifying small MSPs, a portion of the credit can be applied against payroll taxes, even if the business isn’t profitable yet.
An MSP can often benefit from both the deduction and the credit, but they interact, and it’s important to go about this intentionally.
Coordination rules, such as Section 280C, prevent double-counting the same expenses for full benefit. This doesn’t eliminate the incentive; it just means elections matter, and planning ahead is critical.
In practice, this could look like deducting a portion of qualifying R&D wages and software costs immediately to reduce taxable income while claiming the credit on those R&D activities to reduce taxes owed.
Depending on your MSP’s profitability, growth stage, and cash needs, it may be more advantageous to preserve more deductions to lower taxable income or accept a reduced deduction in exchange for a larger usable credit.
One of the most overlooked aspects of the R&D tax credit is the payroll tax offset.
If your MSP qualifies as a Qualified Small Business (QSB), generally meaning:
You can apply up to $500,000 per year of R&D tax credit against employer payroll taxes (Social Security and Medicare).
This is separate from the R&D deduction. The payroll offset applies specifically to the credit, and it can be used even if your MSP isn’t profitable yet.
For growing MSPs, this is a major cash-flow lever:
For MSPs investing heavily in people, systems, and automation, combining immediate R&D deductions with payroll tax credits can significantly reduce the real cost of growth.
Because the OBBBA reversed the mandatory amortization rules, some businesses may be able to amend 2022–2024 tax returns to recover deductions that were previously spread out. This won’t apply to every MSP, but for those with material R&D spend during those years, it can be meaningful.
The OBBBA changed both parts of the R&D tax incentive (the deduction and the credit), and understanding the difference matters.
The MSP business model has evolved. Today’s MSPs don’t just resell tools or provide reactive support; they design, test, and refine systems.
Many of the activities MSPs consider “operations” or “process improvement” can qualify as R&D for both the R&D tax credit and the R&D deduction, as long as they involve technical uncertainty and experimentation.
If your team has ever:
You may already be generating qualified research expenses (QREs).
The distinction is important because those same expenses may be deductible immediately under the restored R&D deduction rules, and potentially credit-eligible, reducing income taxes or payroll taxes.
The key isn’t whether the work was groundbreaking or client-facing. It’s whether there was technical uncertainty at the outset and a process of trial, testing, or iteration. Documenting why the work was uncertain and how your team evaluated solutions matters far more than whether the project ultimately succeeded.
For most MSPs, eligibility isn’t the real obstacle; documentation is. Not because the work doesn’t qualify, but because it was never documented with taxes in mind.
The good news: you don’t need new tools, perfect time tracking, or engineer-level paperwork. What you do need is a repeatable way to capture what your team already did, in a format that supports both the R&D deduction and the R&D tax credit.
Here’s what that looks like in practice.
Start by listing projects, not tickets or one-off fixes.
Good examples:
Avoid generic terms:
Each project should answer one question: What system, process, or capability was the team trying to improve or build?
For each project, document what wasn’t known at the start. This is critical for both the deduction and the credit.
Examples of real MSP uncertainty:
This doesn’t need to be long (3–5 sentences is often enough), but it must explain why experimentation was required.
Next, document how your team tested solutions, even informally.
This might include:
You’re not proving success, you’re showing process.
You don’t need minute-by-minute tracking. Instead, make sure to document:
This supports:
Reasonable estimates based on job function and project involvement are acceptable when documented consistently.
Finally, connect the dots financially.
This typically includes:
The goal is traceability, not perfection.
The R&D tax credit and the R&D deduction aren’t one-time tax perks. For MSPs, they’re tools that can support long-term financial health when they’re built into planning, not tacked on at filing time.
Used together, they can: improve cash flow during growth phases, offset the real cost of internal innovation and automation, and reward teams for building scalable systems instead of relying on manual workarounds. Just as importantly, they shift how MSPs approach taxes. Instead of reacting to a tax bill after the year is over, R&D incentives actively encourage earlier decisions about hiring, tooling, and process improvement.
If there’s one takeaway, it’s this: timing matters. Evaluating R&D after returns are already being prepared often means missed deductions, missed credits, and unnecessary stress. Evaluating it earlier creates options.
With the OBBBA in place, MSPs finally have clearer rules and better timing. The next step is being ready to act on them.
To help with that, we’ve put together a 2026 MSP Tax Prep Checklist, a practical guide to what to review, document, and decide before filing season, so R&D benefits don’t get left on the table.
Learn how MSP owners can maximize the Qualified Business Income (QBI) deduction under the OBBBA, with practical tips on income thresholds, W-2 wages, depreciation, and long-term tax planning for 2026 and beyond.
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