The IRS has made changes to the process of claiming the R&D Tax Credit that will make it both easier and more difficult to apply. In a nutshell, documentation supporting claims will have to be better organized and more explicit in 2025. It is important for businesses and their tax advisors to note the changes and avoid the increased possibility of an audit.
The federal R&D Tax Credit rewards businesses that invest in research and development to spur innovation and growth and keep the US competitive in the global marketplace. Businesses engaged in Qualified Research Activities (QRAs), as outlined by the IRS, can deduct a portion of their Qualified Research Expenses (QREs). Those QREs must be documented in detail. The biggest changes made recently involve the documentation of QREs.
Changes to Form 6765 in 2024
Last year, the IRS simplified the process by reducing the number of business components that must be reported on Section G of IRS Form 6765, limiting them to 50. Taxpayers must report 80% of total QREs for each of those 50 business components. It also made small reductions to the amount of information required for each business component.
Recently, the IRS finalized more stringent rules governing documentation supporting each claimed business component. The purpose is to increase transparency and flag potentially fraudulent claims.
Read more: How to Document Your R&D Activities for a Successful Tax Credit Claim
Increased Documentation Requirements in 2025
Taxpayers will now be expected to provide real-time documentation and detailed information on each business component associated with the qualified research expenses on Form 6765. Claims with retrospective documentation and vague descriptions will be subject to heightened audit activity. Qualified Small Businesses with $1.5 million or less of QREs, or $50 million or less in gross receipts are exempt from submitting Section G. Many small businesses and startups opt to offset up to $500,000 in payroll taxes rather than claim a credit against profits.
For those required to complete the 2025 revised Section G, 80% of the top 50 business components being claimed must be reported in descending order by total qualified expenses. There are further changes for companies employing the ASC 730 directive governing the use of statistical sampling to determine business components that may dramatically complicate their claims. The IRS is accepting comments on this provision until June 30, 2025 and may release additional guidance later in the year.
Taxpayers filing for an increase in the amount of research tax credit must attach amended schedules that identify all business components; classify the QRAs for each; and supply wage, equipment and contract expenses.
Our Recommendation for Claiming the R&D Tax Credit
With an added emphasis on documentation and increased threat of audit, greater focus will have to be placed on planning for the credit and maintaining fastidious contemporaneous records.
To truly maximize the value of R&D tax credits, National Tax Group recommends that our clients filing on an extension, do so by September 30th so they can utilize the credits in Q4, vs Q1 next year.
The R&D Tax Credit is a spot of gold for many American businesses. It provides a dollar-for-dollar reduction in a company’s tax liability, generally worth about 6%-10% of those expenses each year. It is estimated that American businesses saved $18 billion through the R&D Tax Credit last year.
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