Maximizing Your R&D Tax Credit for 2025 & Beyond
For the 2025 tax year and beyond, there are two major landscape changes you need to know about:
1. The Return of Immediate Expensing
Thanks to the One Big Beautiful Bill Act (OBBBA) signed in July 2025, 100% immediate expensing for domestic R&D has been restored. You no longer have to amortize your domestic R&E expenses over five years under Section 174, which drastically improves cash flow. (Note: Foreign R&D must still be amortized over 15 years). Furthermore, if your average gross receipts are under $31 million, we can explore retroactively amending your 2022–2024 returns to immediately expense those years as well.
2. Form 6765 Section G Reporting
The IRS has completely overhauled Form 6765 (the form used to claim the credit). They now expect detailed, project-level accounting known as "Business Component" tracking. While Section G reporting is optional for 2025, it is expected to become mandatory in 2026 for businesses with over $1.5 million in Qualified Research Expenses (QREs).
Key Recommendation: Do not wait for an audit to justify your expenses. "Contemporaneous documentation"—tracking time and expenses as they happen rather than estimating at year-end—is the absolute best way to bulletproof your claim. Implementing the spreadsheet structures below will ensure you are audit-ready and maximizing your eligible credit.
1. The Gatekeeper: The IRS Four-Part Test
Before collecting data, your project managers need to know what qualifies. For a project (Business Component) to be eligible, it must pass all four parts of this IRS test:
Permitted Purpose: The goal must be to create a new or improved product, process, software, formula, or technique that improves performance, reliability, or quality.
Technological in Nature: The development must rely on hard sciences (engineering, computer science, biological science, physics).
Elimination of Uncertainty: At the start of the project, you did not know if you could achieve the goal, how to achieve it, or the appropriate design of the final product.
Process of Experimentation: You engaged in a systematic process to overcome that uncertainty (e.g., modeling, simulation, prototyping, trial and error).
2. The Data Collection Process
To build a defensible claim, we need to collect data across three main categories: Wages, Supplies, and Contract Research.
Phase 1: Identify Business Components (Projects)
List every project, product, or internal software update your team worked on during the year.
Filter this list through the Four-Part Test.
Write a brief technical narrative for the qualified projects detailing the uncertainty faced and the experimentation process used.
Phase 2: Track Employee Wages
Employee wages usually make up the largest portion of the R&D credit. We need to identify employees who performed R&D, directly supervised R&D, or directly supported R&D.
Pull the W-2 Box 1 wages for all relevant employees.
Estimate or pull time-tracking data for the percentage of time each employee spent on qualified projects.
Phase 3: Gather Supply Costs
Supplies are tangible materials consumed or destroyed during the R&D process (e.g., prototype materials, testing chemicals, server space for development/testing).
Pull invoices for materials that were strictly used for testing and prototyping.
Exclusion: General administrative supplies, travel, and capital assets (equipment that depreciates) do not qualify.
Phase 4: Compile Contractor Invoices
If you paid third-party U.S.-based contractors or engineering firms to perform R&D on your behalf, those expenses can qualify (typically at 65% of the invoice cost).
Gather 1099s and invoices for outside developers, engineers, or testing labs.
Ensure you have copies of the contracts to prove your company retained the financial risk and the rights to the intellectual property.
