​The R&D Tax Credit and Deduction: Major Filing Changes for 2025 Tax Year

While the lucrative research and development (R&D) tax credit isn’t a new tax incentive, there are many new rules and benefits.  

The One Big Beautiful Bill Act (OBBBA) provides relief to taxpayers by restoring the option to fully deduct R&D expenses. Additionally, the IRS has proposed a change to Form 6765 — which is used to claim the tax credit — that will introduce a new layer of complexity and require detailed project information to substantiate claims. 

Claiming the R&D tax credit isn’t an easy process, but it can be a worthwhile one, as the credit directly   reduces tax liability dollar-for-dollar, unlike deductions that only reduce taxable income.

Learn about the R&D tax credits and deductions for 2025 and how you can prepare for potential legislative and procedural changes. 

Decoding R&D tax credit rules: A comprehensive overview

The R&D tax credit — a significant incentive for businesses engaged in research and development — has specific qualification rules for activities and expenses. It’s essential to know these to accurately determine eligibility. 

Central to these rules is the four-part test that includes: 

• Permitted purpose
• Technological in nature
• Elimination of technical uncertainty
• Process of experimentation

Activities not only should aim at developing new or improved business components but also must rely on hard sciences, such as chemistry or computer science. They also should address technical uncertainties regarding capability, methodology, or design and involve an iterative process of testing hypotheses.  

Considerations outside the four-part test

In addition to the four-part test, businesses must consider the economic risk of bearing the research costs regardless of success or failure. Additionally, having substantial rights in the developed product and restricting qualified activities to within the United States are crucial. Excluded activities — such as those in the social sciences, research after commercial production, and several others — do not qualify for the tax credit. 

It's important to understand the breadth of costs that can be claimed under the R&D credit. These include wages, supplies, contract research, and cloud computing costs, among others. Notably, certain costs are specifically excluded from the credit.  

The financial implications of the R&D tax credit are significant, with the average credit ranging from 6 – 10% of the qualified costs. These credits directly reduce tax liability dollar-for-dollar, unlike deductions that only reduce taxable income. 

A benefit for startup companies

Since 2016, qualified small businesses may apply up to $250,000 of their R&D credits against employer Social Security payroll taxes — a major benefit for cash flow-focused startups generating tax losses.  

Beginning in the 2023 tax year, small businesses can now apply up to $500,000 of their R&D credits, and the credit can offset both employer Social Security and Medicare taxes, providing even more cash-flow benefits to early-stage organizations investing in R&D. 

R&D tax credits directly reduce tax liability dollar-for-dollar, unlike deductions that only reduce taxable income.

Proposed changes to Form 6765 and R&D tax credit claims

Recent procedural updates include significant changes proposed for Form 6765. Introduced in December 2024, the new form requires detailed information about business components or projects eligible for the R&D tax credit. 

Taxpayers will need to provide: 

• A list of qualified R&D business components and projects
• The amount of qualified research expenses claimed for each business component and project
• Whether any acquisitions or dispositions occurred during the year
• Descriptions of the information sought to be discovered and alternatives evaluated in the process of experimentation for each business component and project

This level of detail historically has not been required on Form 6765, as it previously only called for quantitative data such as costs and election choices. The IRS’s intention behind this change is to help taxpayers fully understand and substantiate their R&D credit claims. However, the increased reporting requirements may present a significant burden, particularly for companies with numerous R&D projects. 

The increased reporting requirements may present a significant burden, particularly for companies with numerous R&D projects.

Expected effective date to changes to Form 6765

The IRS recently announced some of the more burdensome reporting requirements will be optional for 2025 tax returns, but required for 2026. This provides taxpayers with some time to prepare. 

Taxpayers are advised to begin building comprehensive lists of R&D business components and projects and tracking allocated time to comply with the form changes. Proactive steps taken now can help ease the transition and readiness for the new reporting standards. 

Understanding legal precedents in R&D tax credit claims

Recent court cases have emphasized the importance of proper documentation when claiming R&D tax credits. The cases of Little Sandy Coal vs. Commissioner, Phoenix Design Group vs. Commissioner, and Meyer, Borgman, and Johnson, Inc. vs. Commissioner serve as critical reminders for businesses to maintain detailed records of their R&D activities and projects. 

Key documentation practices should include:

• Recording technical uncertainties
• Documenting specific experimentation processes 
• Associating employee time and costs with specific projects (i.e., building nexus between costs and activities)

These practices are not only crucial for meeting legal requirements but also for defending R&D credit claims in the event of an IRS or state audit. 

Navigating the complex landscape of IRC Section 174

Businesses have faced significant challenges since the implementation of the Section 174 capitalization requirement, which mandated that R&D expenses be capitalized and amortized — five years for domestic R&D and 15 years for foreign R&D — for tax years beginning after December 31, 2021. This change, introduced by the Tax Cuts and Jobs Act (TCJA), created cash flow constraints and increased tax burdens for innovation-driven companies.

However, the landscape has shifted under OBBBA. The law introduces Section 174A, which restores full expensing for domestic R&D expenditures for tax years beginning after December 31, 2024. 

Taxpayers now have the option to either deduct domestic R&D costs in the year incurred or elect to amortize them over a minimum of 60 months. Importantly, foreign R&D expenses remain subject to 15-year amortization, consistent with prior law. 

OBBBA also provides retroactive relief for small business taxpayers, defined as those with average annual gross receipts under $31 million for 2022 – 2024 and not classified as tax shelters. These businesses may elect to apply the new expensing rules retroactively to tax years beginning after December 31, 2021, potentially unlocking refunds for previously capitalized expenses. 

OBBBA marks a significant win for U.S. businesses investing in innovation, offering both immediate tax relief and strategic flexibility. Companies should consult with tax advisors to evaluate whether to amend prior returns, accelerate deductions, or adjust future R&D planning considering the new law.

How CLA can help with the R&D tax credit

Our dedicated R&D team has helped small, medium, and large businesses in a variety of industries identify and document their qualifying research activities to enhance their R&D credit potential. 

We understand the complex qualification rules, have deep knowledge in the most credit-intensive industries, and have years of experience developing supportable tax credit claims. 

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