SBIR/STTR Program 2025 News and Updates

2025 has been a turbulent year for SBIR/STTR awards and the companies that rely on them. 

With a new federal administration implementing widespread agency changes and the programs up for reauthorization in September, there is plenty to navigate for anyone planning to apply for an SBIR/STTR this year or currently conducting R&D funded by one. In this article, we will unpack the disruptions to federal grants like SBIR/STTR that happened earlier this year, the current status of these programs, their reauthorization this year, and what small businesses should consider as they pursue R&D funding moving forward.

Recap of Major SBIR/STTR Events in 2025

1. Funding freezes, interruptions to the review process, and re-reviews

In January, the federal government paused all federal financial assistance payments, including grants like SBIR/STTRs. The portals to draw down funds were at times inoperable, either related to this pause or due to high volume of users attempting to check on their awards. However, it was clarified that programs like SBIR and STTR were not to be affected by federal changes, and companies were able to access their funds again, albeit with some additional delays in the actual transfer of money to further review requests.

Changes differ by agency

Federal agencies administer their own SBIR/STTR programs, rather than deferring to the SBA. The various agencies are taking different approaches regarding pausing and reviewing, or re-reviewing, their existing awards, applications, and solicitations.

In several cases, the review processes for submitted grant proposals were interrupted and delayed. For example, NIH study sections, critical in the review process, were effectively canceled or not able to meet for several weeks, due to a hold on federal register announcements. However, it appears that these have been rescheduled, with a study section and review date assigned. NIH study section announcements caught up to where they would be in previous years in late March. In April, NSF froze new grant awards for staff to do a second review; this was soon lifted, and NSF has resumed processing proposals and issuing awards.

At the solicitation stage, the Department of Energy and USDA are several months delayed in accepting SBIR/STTR Phase II proposals. Neither agency has announced when their Phase II solicitations will be released. Even the Department of Defense has been affected: AFWERX took down a solicitation and later reposted it after reviewing the topics, though it is worth noting that, in this case, they also added a few more topics.

Some good news

One piece of good news is that federal agency funds have been allocated for the remainder of the fiscal year under a Continuing Resolution (through Sept 30), and all SBIR/STTR agencies received close to their originally planned level of funding. This means that overall agency budgets for SBIR/STTR awards for the fiscal year should remain steady, and agencies are obligated to distribute the full amount they received.

2. Massive numbers of grant terminations

Federal grants, including many for research or R&D, have been terminated en masse. According to Grant Watch, a database set up to track these terminations, 1500+ existing or awarded grants from Health and Human Services (which includes the NIH), worth over $1.9 billion, have been terminated as of early May. About 90% of these grants were for research and development. Some notable examples have included a set of 20+ projects on patients’ vaccine decision-making as well as grants with “DEI” references or aspects to the project, though the exact definition of what makes a grant “DEI” is somewhat unclear. Similarly, NSF has terminated over 1400 awards, worth over $1 billion, though most of the NSF cuts have been to education grants, rather than research. At NSF, grants that contain any perceived “DEI” component or references to climate change may be top candidates for such action.

SBIR/STTR grants less likely to be terminated

Crucially for small businesses, very few of these terminations have been SBIR or STTR grants. As of early May, NIH has cancelled five SBIR/STTR awards, and NSF has so far cancelled eight. While small businesses applying for or holding SBIRs and STTRs so far have mostly been safe from losing their funding, many experts are advising caution around the aforementioned topics in the framing and wording of future proposals.

3. Proposed changes to indirect cost rates

An NIH notice indicating that all existing grants and future grants must limit the indirect cost rate in their budget to, at most, 15% attracted plenty of headlines in early February. However, it was not entirely clear whether this would affect SBIR/STTR applicants or be limited to universities. Several other federal agencies, including the NSF and DoE, have subsequently released similar guidance. For now, this limit has not gone into effect due to the proceedings of a lawsuit in the U.S. District Court for the District of Massachusetts. The judge has issued an order temporarily blocking the 15% cap.

Some groups are recommending that new applications use a 15% indirect cost rate preemptively, as a grant budget can be reduced but not increased. One can ethically recategorize some indirect costs as direct costs if 15% is too low to work for the organization’s budgetary needs. Overall, opinions vary on the best immediate course of action, and future court decisions will heavily influence this matter.

4. The tax Section 174 remains under scrutiny

Implications of Internal Revenue Code Section 174 have vexed many SBIR/STTR companies for the last few years. Historically, companies were able to deduct R&D expenditures in the year they were incurred. However, the Tax Cuts and Jobs Act, passed in 2017, required companies to amortize R&D expenditures over at least five years, starting in taxable years after 2022.

Legislation has recently been proposed to fix this issue. The “American Innovation and R&D Competitiveness Act of 2025,” introduced in the House, contains a retroactive fix allowing immediate and retroactive deduction of R&D expenditures. Recently introduced, “The One, Big, Beautiful Bill” also contains a section that would enable immediate deduction of R&D expenditures, although it does not include a retroactive component.

Similar legislation addressing the Section 174 issue passed the House last year but was not voted on in the Senate. It remains to be seen whether this Congress will more highly prioritize the issue.

Possible SBIR/STTR changes due to the new federal budget and SBIR/STTR program reauthorization

President Donald Trump’s newly introduced Fiscal Year 2026 Discretionary Budget Request proposes significant downsizing of the NIH, NSF and other agencies that operate large SBIR/STTR programs. It calls for a 37% reduction in spending at the NIH, and over 50% at the NSF. NASA, DoE, NOAA, USDA and other agencies that fund science would also see sizable cuts. 

As agency SBIR/STTR budgets are determined by a percentage of each agency’s overall extramural R&D budget, reducing the overall budget would proportionally impact SBIR and STTR programs. If agencies with smaller R&D budgets, like the Department of Education, EPA, and Department of Transportation, fall under the $100 million extramural R&D threshold, they will no longer be required to operate an SBIR program.

Not only are agencies’ R&D budgets in question, the SBIR and STTR programs need to be reauthorized this year. However, this is perhaps not as existential a situation as it might seem. The programs have been reliably reauthorized over their four decades of existence. Currently, there are two reauthorization Acts introduced, each of which presents some interesting changes, in addition to maintaining the existence of SBIR and STTR.

1. The INNOVATE Act, introduced by Senator Joni Ernst (R-Iowa)

This Act proposes increasing the extramural R&D budget share for SBIR at each agency from 3.25% to 3.45%. By contrast, it proposes decreasing the share for STTR from 0.45% to 0.2%. Additionally, the portion of work on an STTR that may be conducted by the research institution partner would decrease from 30-60% to 20-50%.

Currently, SBIR has two official phases, Phase I and II. The INNOVATE Act proposes adding formal Phase IA and Phase III awards in certain contexts. Phase IA would fund first-time SBIR/STTR winners creating new, early-stage innovations. It would require a proposal of two pages or less and would provide up to $40,000 in funding. Phase III awards would be offered at the DoD and designed to help SBIR Phase II awardees move into the defense market, with funding up to $30 million, plus a mandatory match from a private firm. DoD would also be required to develop an acquisition strategy for all Phase III projects.

The INNOVATE Act also includes some policies that would impact the distribution of awards. It would emphasize outreach and assistance to the 25 states with the fewest number of award recipients. Additionally, it would create limits on the volume of proposals from and awards to any given business, intended to reduce the ability of businesses to be “SBIR mills” that continually win new SBIRs but have not demonstrated significant commercial success. 

2. The SBIR/STTR Reauthorization Act of 2025, introduced by Senator Ed Markey (D-Mass.) and Congresswoman Nydia Velázquez (NY-7)

The SBIR/STTR Reauthorization Act proposes several meaningful changes to grow and maintain the programs. First, it would make both programs permanent, eliminating the need for periodic reauthorization. Additionally, it would greatly increase the budget allocations for both SBIR and STTR. Agencies would be required to increase their extramural R&D budget allocation to 7% for SBIR and 1% for STTR, up from 3.25% and 0.45%, respectively. They would be allowed seven years to implement this change.

An interesting contrast with the INNOVATE Act is that the SBIR/STTR Reauthorization Act places no limits on the number of awards a small business can receive. It emphasizes that awards should be made on merit-based competition.

Top five tips if considering applying for SBIR/STTR funding in the second half of 2025

1. Consider applying for multiple opportunities: maximize your company’s shots on goal. Congress mandates certain levels of SBIR/STTR funding to be distributed. Consider partnering with universities or other businesses to create strong proposals for opportunities you might not have otherwise targeted.
2. Prepare for changes: different topics may be prioritized in future solicitations, and the evaluation criteria may evolve. Consider U.S. strategic goals such as national security, U.S.-based manufacturing, and speed of transition from lab to market.
3. Plan your budget carefully: this is true for both the business in general and for each individual grant. Ensure your business has sufficient funding to continue with effective R&D that moves the technology closer to market. Determine whether both R&D and administrative costs can be made leaner and whether some indirect costs like lab rent and supplies can be made direct costs on grants.
4. Be prepared for additional pre-award screening: proposals that pass scientific review will likely be increasingly scrutinized for any foreign involvement, security risks, or anything seen as “DEI.” Foreign risk assessment is a growing part of the award process.
5. Be patient but persistent: there will probably be more delays and staffing changes at federal agencies. Know your program manager/officer and keep in touch with them. If you cannot get a response, it is acceptable to contact their peers and later their superiors. For example, indicate that you are trying to reach “Dr. Smith” and would appreciate their assistance.

Moving Forward with SBIR/STTR Funding in 2025

Although it has been an eventful and, at times, stressful year for companies funded by federal awards or pursuing additional SBIR/STTR funding, there is still good reason to apply and push forward with awards. By leveraging up-to-date information, a thorough and diverse funding strategy, strong connections with the funding agencies, and the resources available in the state of North Carolina, your business can still be highly successful in funding your innovation in 2025.