What the Reconciliation Bill (BBB) Means for the U.S. Innovation Ecosystem
On July 4, 2025, President Trump signed HR 1, widely known as the 'One Big Beautiful Bill', into law. This sweeping budget reconciliation bill not only extends major tax cuts from 2017, but also includes significant funding provisions for innovation, defense and space capabilities. While the law makes significant cuts to programs like Medicare, Medicaid and those related to clean energy innovation, many of the enacted provisions will have tangible, strategic value for emerging technology startups, and small businesses. Below is a detailed breakdown of the bill’s impact on key innovation and entrepreneurial sectors.
R&D Expense Deduction (Sec. 70302)
This provision restores the ability for companies to fully deduct domestic research and experimental expenditures in the year they are incurred. Previously, under TCJA rules, such expenses had to be amortized over five years. The new law makes this change retroactive to January 1, 2022, and allows businesses to file amended returns to recover previously deferred deductions.
Impact: Startups can significantly boost cash flow and reduce taxable income in high R&D years. This change benefits early-stage ventures heavily invested in software development, biotech, AI, materials science, and other innovation-heavy fields.
Special Depreciation Allowance for Qualified ProductionProperty (Sec. 70307)
Bonus depreciation allows businesses to immediately write off the full cost of qualifying capital equipment. The bill extends 100% bonus depreciation through the end of 2026, after which it begins to phase down. Eligible assets include machinery, robotics, manufacturing tools, and IT infrastructure such as servers.
Impact: Tech and hardware startups making capital-intensive investments, such as building prototypes or standing up small production lines, can recover costs upfront, improving ROI and extending their runway.
Permanent 199A Deduction (Sec. 70105)
Section 199A allows owners of pass-through entities to deduct up to 20% of their qualified business income. Originally set to expire in 2025, the new law makes this deduction permanent, giving long-term certainty to LLCs, S-corporations, and sole proprietors.
Impact: Founders and operators of pass-through startups receive ongoing tax relief. This is especially beneficial for small teams notyet structured as C-corps or those in professional services and consulting-heavy verticals.
Corporate Tax Rate Maintained (No Designated Section)
The bill maintains the flat federal corporate income tax rate at 21%. There are no added surcharges or alternative minimum tax provisions for corporations.
Impact: Startups operating as C-corporations, often those pursuing venture capital, maintain a globally competitive tax rate. This predictability is important for long-term planning and valuation.
Opportunity Zones Permanently Extended (Sec. 70421)
Opportunity Zones allow investors to defer and ultimately exclude capital gains taxes on investments in designated low-income areas. A 30% step-up in basis is available for Opportunity Zone investments held for 5 years in designated rural areas, compared to 10% for non-rural zones. The bill makes this program permanent, providing long-term incentive alignment for development and startup activity in these regions.
Impact: Founders can attract mission-aligned capital, benefit from tax-efficient fundraising, and potentially locate operations in OZs to capitalize on real estate and cost advantages while accessing incentive-linked funds.
Spectrum Auctions (Sec. 40002)
Directs the FCC and NTIA to identify and auction 600 MHz of federal mid-band spectrum (1.3–10 GHz) by 2034. This spectrum is critical for the expansion of 5G, 6G, IoT, and edge-computing networks.
Impact: Wireless startups, IoT device manufacturers, and edge infrastructure platforms will benefit from expanded spectrum availability, unlocking new commercial applications and private-sector deployments.
NASA Advanced Missions Funding (Sec. 40005)
$25.383 billion appropriated to NASA for its next-gen space missions including the Lunar Gateway, Mars telecommunications relays, ISS extension, and planetary defense tech. Also supports commercialization partnerships and SBIRs tied to autonomous systems and aerospace R&D. Key appropriations are listed below.
$7.97 billion appropriated for Exploration Systems Development, which includes:
- The Artemis lunar mission program
- Orion crew vehicle
- Space LaunchSystem (SLS)
- Lunar Gateway
- Human Landing System (HLS)
- Moon-to-Mars transition architecture
$4.47 billion appropriated for space operations, which supports:
- International Space Station (ISS)
- Low Earth Orbit (LEO) commercialization
- Transition to commercially operated space stations
Impact: Space-focused and dual-use startups can access new grant and contract opportunities through NASA. Companies in propulsion, AI navigation, robotics, and in-orbit services stand to benefit.
Rural Health Transformation Program (Sec. 71401)
The bill provides $50 billion over five years to help rural hospitals offset expected losses from reductions in Medicaid and Medicare. This new program will be administered by CMS and offers $10 billion per year over 5 years to U.S. states. While the bill imposes caps on Medicaid matching funds and tightens eligibility in some areas, this program provides critical support to rural providers through state disbursements and implementation grants.
Impact: Digital health and health IT startups, especially those with solutions for care delivery, remote monitoring, or hospital system integration, can access new state-directed funds as part of rural network modernization efforts. Companies aligned with rural needs may be eligible to partner directly with hospitals or serve as contractors through state-administered funding programs.
Defense Innovation Investments (Title II)
This provision allocates over $150 billion in total defense funding, including applied research and procurement for autonomous systems, secure communications, AI-enabled defense tech, and emerging threats. The bill supports partnerships with DIU, DARPA, and service branches under new acquisition flexibility.
Impact: This funding fuels a strong dual-use ecosystem. Startups working in defense AI, battlefield robotics, secure mesh networks, cybersecurity, and autonomous systems can expect expanded SBIRs, OTA contracts, and pilot engagement with military partners.
Below are specific allocations for dual-use and future-oriented innovation:
$16B for Advanced Tech & Scaling Low-Cost Weapons Into Production (Sec. 20005). Includes:
- $2 billion for DOD’s DefenseInnovation Unit (DIU)
- $50 million for the creation of additional DIU OnRamp Hubs
- $1.4 billion for small unmanned aerial system industrial base
- $1,000,000,000 for the expansion of programs to accelerate the procurement and fielding of innovative technologies
- $600 million to expand DOD’sMission Capabilities Office for joint prototyping and experimentation activities for military innovation.
Additional Key DOD Appropriations Include:
$29B for Shipbuilding (Sec. 20002): Funds 16 ships in the Navy’s FY26 request, including 2 Arleigh Burke-class destroyers and 1 Virginia-class submarine.
$25B for “Golden Dome” Domestic Missile Defense (Sec. 20003): This funding is intended to support the development and implementation of a next-generation missile defense system that would include:
- $7.2 billion for the development and procurement of military space-based sensors.
- $5.6 billion to develop space-based and boost-phase intercept capabilities.
- $250 million to develop directed energy capabilities.
$25B for Munitions (Sec. 20004): Spreads across multiple programs; includes $5B for critical minerals supply chain.
$15B for NuclearModernization (Sec. 20008): Adds $150M for nuclear delivery programs; removes $96M in classified spending.
$12B for Indo-Pacific Deterrence (Sec. 20009): Adds $1B for the X-37 space plane and $3.6B for military satellites.
$9B for Air superiority (Sec. 20007): Adds $600M for Air Force and $500M for Navy long-range strike aircraft.
For more information, please contact James Kirby at: jkirby@saxainnovation.com