Research & Development Tax Credit: Recent Law Changes

Recent federal tax legislation has introduced significant changes to the treatment of research and development (R&D) expenses and the associated credit:

• Under One Big Beautiful Bill Act (OBBBA), for tax years beginning after December 31, 2024, domestic research and experimental expenditures under Section 174 may be immediately expensed or elect to amortize the costs for at least 5 years (instead of the previous requirement to amortize costs over 5 years) under the newly-created Section 174A. Foreign R&D continues to be amortized over 15 years.
• The bill also provides retroactive relief for many businesses (especially smaller businesses) for tax years 2022–2024, allowing amended returns or catch-up deductions to take advantage of the new treatment.
• Reporting and documentation requirements have increased: the Form 6765 (Credit for Increasing Research Activities) has been updated for the 2024/2025 tax-years to include more detailed business-component level information and sampling plans.
• Additionally, the IRS has enhanced scrutiny of claims, requiring stronger project-level tracking, timekeeping, and documentation to substantiate the credit.

These changes mean that businesses engaged in R&D (or believing they might be) need to re-examine their expense treatment, documentation practices, and credit eligibility now more than ever.

Understanding the R&D Tax Credit

Many businesses overlook one of the most valuable incentives available to them from the R&D Tax Credit. Designed to encourage innovation, this credit rewards companies that invest time and resources into developing new products, processes, or technologies — or improving existing ones. Knowing the 4-part test R&D tax credit is a simple way to identify qualified research activities:

• Permitted purpose: Qualified activities work to improve a new or existing product or process’s functionality, reliability, quality, or performance.
• Technological nature: The activities rely on the principles of physical science, computer science, biological science, or engineering.
• Eliminate uncertainty: The activities make improvements that lead to eliminating technical uncertainties regarding a product’s capabilities, design, or method.
• Experimentation: The activities involve experimenting through processes like testing, simulating, and trial and error of hypotheses.
  

What Is the R&D Tax Credit?

The R&D tax credit is a dollar-for-dollar reduction of your tax liability. It can apply to wages, supplies, and even certain contractor costs associated with qualified research activities. Best of all, it’s not limited to high-tech or lab-based industries — any company working within the United States to develop or improve a process, or a product can claim the credit, no matter what industry it is in.

Who Can Benefit

Many businesses across a wide range of industries engage in qualifying activities without realizing it. Common examples include:

• Manufacturing and fabrication – developing new or improved production processes or products
• Software development and technology – creating or enhancing software, apps, or systems
• Architecture and engineering – designing innovative structures or solutions
• Construction and design-build firms – improving construction methods or materials
• Food and beverage – developing new recipes, packaging, or production techniques

If your business invests time or resources in problem-solving or innovation, there’s a good chance you could benefit.

Why It Matters

The credit can significantly reduce your tax burden and free up cash for future growth. Many companies can also claim credits for prior years, meaning there could be money left on the table.

How to Get Started

Determining eligibility and calculating the credit can be complex. Our firm partners with experienced third-party specialists to help identify qualifying activities, how to document expenses, and ensure full compliance with IRS requirements.