One of the most longstanding business tax benefits—the Research and Development (R&D) Tax Credit—is shifting yet again. The One Big Beautiful Bill Act (OBBBA), passed in July 2025, included changes regarding the treatment of R&D expenses.
Below, we’re sharing a refresher on the R&D tax credit, discussing its history, and sharing what businesses can expect when they apply for the tax credit today.
What is the research and development tax credit?
The Research & Development (R&D) Tax Credit, also known as the Credit for Increasing Research Activities, is a general business tax credit that was first introduced in 1981. Its aim has been to incentivize companies to perform R&D within the United States. Companies that qualified were able to reduce their tax liabilities by approximately $0.13 cents for every dollar spent. While it was initially intended to be temporary, the R&D tax credit was made permanent over 30 years later in 2015. This has made it a perennial tax planning item that shouldn’t be overlooked.
And yet this is exactly what has happened.
In 2019, an estimated $60 billion of the $92 billion available R&D tax credits went unclaimed. This was due to two main reasons:
Lack of awareness. Many companies didn’t know the credit existed or that they may qualify, believing the definition of “research and development” was narrower than it is (more on this in the myths below).
Many didn’t realize there were expanded ways to use the credit when they didn’t have any taxable income. For example, after the Protecting Americans from Tax Hikes (PATH) Act of 2015 was passed, many startups and small-mid size businesses that ordinarily had no income tax could take these credits to offset other types of taxes, primarily payroll taxes.
Review our deep dive into the federal R&D tax credit here.
What does research and development actually mean?
One of the biggest common misconceptions is in the very definition of “research and development.” Most companies believe that research and development only takes place in laboratories with scientists in lab coats, or in actually designated R&D departments. However, the tax definition is much broader. For the purposes of qualifying for the credit, R&D can refer to work that:
Involves technical uncertainty—that is, it’s unclear if or how something can be done, or to determine something where the outcome is unknown;
Is technological in nature— The work relies on a hard-hat science (i.e., something you might find in a school textbook, like math, computer science, chemistry);
Involves a process of experimentation—testing and evaluating alternatives (and the outcome need not be successful!); and
Is for a permitted purpose—a new or improved functionality, performance, reliability, or quality.
All this to say, “R&D” can, and does, apply to virtually every industry. Evaluating business processes, developing new products, experimenting with new technologies, compiling research data, creating more environmentally sustainable systems or designs—these all qualify as research activities.
Changes over the last 5 years
Beginning in the 2023 filing season, a provision in the Tax Cuts and Jobs Act of 2017 (TCJA) impacted Section 174 of the tax code, leaving many companies unclear on how it would affect the tax treatment of R&D expenditures.
The TCJA stated that starting from the 2022 tax year, companies that deduct R&D expenses would have to be capitalized and amortized over 5 years in the US, whereas previously, they could deduct 100% in the year in which they were incurred. This rule change had significant implications for startups and small businesses conducting R&D. A revenue-generating startup that had been investing significantly in R&D and previously may have owed no income tax now ended up needing taxes that were consequential for their businesses.
This made claiming the R&D credit more important than ever, but rather than see an increase in tax credit claims, many businesses decided to “wait and see,” hoping that these requirements would be reversed by legislation. That legislation didn’t happen in 2023 as many anticipated, and left many taxpayers, accountants, and observers confused, and, in some cases, not in compliance.
Recent developments
There have been a few significant changes to the R&D tax credit lately, so it’s crucial to make sure you’re up to date. Here are the key updates:
Businesses can deduct their US-based expenses again
The OBBBA’s passing reversed the amortization requirements from the TCJA. Starting in 2025, businesses can once again deduct their US-based R&D expenses in full, or choose to amortize those expenses over five years if they want to. R&D conducted outside the US still has to be amortized over 15 years.
Businesses can also decide to deduct any remaining unamortized US-based R&D expenses incurred between 2022 and 2024.
The IRS extended the dates for certain reporting requirements
On October 1, 2025, the IRS announced that it will be extending the deadlines for certain reporting requirements related to the R&D credit. Here’s what you need to know:
Section G—which requires you to provide details about your R&D activities—of Form 6765 is optional for tax year 2025, but will be mandatory for most businesses for tax years 2026 and beyond. There are two exceptions:
Qualified Small Businesses (QSBs) electing the payroll tax credit under Section 41(h)(3)
Taxpayers with qualified research expenditures (QREs) of $1.5 million or less and gross receipts under $50 million
The research credit claim transition period, which gives businesses 45 days to perfect a research credit claim for refund, has been extended through January 10, 2027.
Small businesses can deduct R&D expenses retroactively
As part of the OBBBA, small businesses that have average gross receipts under $31 million can now retroactively expense US-based R&D costs from years 2022, 2023, and 2024. Businesses have to make the election for amended returns by July 6, 2026.
Get your R&D ducks in a row
Though you’re not required to fill out Section G of Form 6765 for the 2025 tax year (processing in 2026), it’s still a smart idea to gather the information you need to fill it out starting in 2027 (for the 2026 tax year).
Start maintaining thorough records of all your research and development activities and expenses, and consider whether or not you need to amend your 2022-2024 tax returns given the credit’s updates. When in doubt, reach out to your CPA or another business tax professional who can guide you.
FAQs
What are the IRS qualification requirements (the four-part test) for the R&D Tax Credit?
The IRS has certain qualification requirements for research activities for the R&D credit. To qualify as a research activity, an activity must be:
Technological in nature;
used to improve the functionality, performance, reliability, or quality of a new or existing business component;
used to gather information that will help eliminate uncertainty around the development of a product;
And involve a process of experimentation, such as testing or modeling.
What expenses or activities are eligible to be included in the R&D Tax Credit calculation?
Eligible expenses and activities for the R&D tax credit calculation include wages of W-2 employees involved in the research activities; supplies and materials used in or for the research activities; contract research expenses for businesses that hire third parties to help them conduct R&D; and computer rental and software costs related to the R&D activities.
How does the R&D Tax Credit differ from the R&D Payroll Tax Credit for small businesses?
The R&D Tax Credit lowers a business’s federal and state income tax liability, whereas the R&D Payroll Tax Credit lowers an eligible small business’s payroll tax liability (the employer portion of Social Security and Medicare taxes). The R&D tax credit is available to any business conducting qualified research activities, but the R&D payroll credit is only available to small businesses conducting qualified research activities that have less than $5 million in gross annual receipts and no more than five years of gross receipts history.
What is the maximum value of the R&D Tax Credit that a company can claim annually?
There’s no maximum value for the R&D credit; how much a company claims depends on its total qualified research expenses.
What are the documentation and record-keeping requirements needed to support an R&D claim if audited?
To be prepared in case of an audit, it’s critical to keep detailed, thorough records of your business’s R&D activities and expenses. That includes project notes and briefs, as well as progress reports; design notes and data; prototypes and test plans; contracts and invoices from third-party vendors; receipts and purchase orders for supplies and materials; W-2 forms and payroll breakdowns; and employee timesheets or time-tracking software.
