The R&D Tax Credit and the R&D Deduction

Two Incentives, One Compliance Discipline

By Jessica Irving Marschall, CPA May 2026

For more than four decades, federal tax law has offered businesses two separate and distinct incentives for investing in research. The first is the credit for increasing research activities under Internal Revenue Code Section 41, commonly called the R&D tax credit. The second is the ability to recover research and experimental expenditures through a deduction or through amortization under Sections 174 and 174A. These provisions are frequently discussed as if they were a single benefit. They are not. They are calculated differently, claimed differently, and governed by different rules. They also interact in ways that can quietly erase part of the benefit if a taxpayer is not paying attention.

The legislation enacted on July 4, 2025, commonly referred to as the One Big Beautiful Bill Act, or the OBBBA, and codified as Public Law 119-21, reshaped the deduction side of this equation and, in doing so, changed how the two provisions coordinate. At the same time, the Internal Revenue Service has completed the most significant redesign of Form 6765 in the form’s history. The result is a more generous set of incentives paired with a meaningfully higher compliance and substantiation burden. This article explains the difference between the credit and the deduction, how they interweave, what the redesigned Form 6765 now requires, how bookkeepers should structure the accounting records to support a claim, and why the sheer size of these incentives makes disciplined documentation a matter of audit readiness rather than optional housekeeping.

Two Incentives, Clearly Separated

The R&D tax credit under Section 41 is a nonrefundable income tax credit. Congress enacted it in the Economic Recovery Tax Act of 1981 and, after decades as a temporary provision, made it permanent in the Protecting Americans from Tax Hikes Act of 2015. The credit is incremental in design. It is intended to reward research spending above a base amount rather than to subsidize every research dollar. A taxpayer may compute it under the regular method, which carries a headline rate of 20 percent, or under the alternative simplified credit, which carries a headline rate of 14 percent. Because of the base calculations and other limitations built into each method, the effective rate is considerably lower than the headline figures suggest. The Congressional Research Service has estimated the weighted average effective marginal credit rate at approximately 8.2 percent.

The R&D deduction is a different mechanism entirely. It does not reduce tax liability dollar for dollar. Instead, it reduces taxable income, in the same way that any ordinary and necessary business expense does. For most of United States tax history, research and experimental expenditures were fully deductible in the year incurred. The Tax Cuts and Jobs Act of 2017 changed that. For tax years beginning after December 31, 2021, domestic research and experimental expenditures had to be capitalized and amortized over five years, and foreign research and experimental expenditures over fifteen years.

The simplest way to keep the two straight is this. The credit answers the question of how much tax you owe. The deduction and amortization rules answer the question of how much income you are taxed on, and in which year.

The Deduction and Amortization Rules After the OBBBA

The OBBBA added new Section 174A to the Internal Revenue Code. For tax years beginning after December 31, 2024, Section 174A restores and makes permanent the immediate deduction of domestic research and experimental expenditures in the year they are paid or incurred. This reverses the TCJA capitalization mandate for domestic costs and returns the treatment of domestic research to its long-standing form.

Foreign research and experimental expenditures did not receive the same relief. Under Section 174, expenditures attributable to research conducted outside the United States must still be capitalized and amortized ratably over a fifteen-year period. The contrast is deliberate. By allowing an immediate deduction for domestic research while requiring fifteen-year recovery for foreign research, Congress has built a clear tax preference for onshore research activity. Practitioners should carefully review the post-OBBBA limitations on recovery of previously capitalized foreign research expenditures upon disposition, retirement, or abandonment, including restrictions affecting basis recovery and disposition treatment.

The OBBBA provided transition relief for the 2022 through 2024 capitalization years. Eligible small businesses, generally those with average annual gross receipts of 31 million dollars or less under the Section 448(c) test, generally may elect retroactive treatment under Section 174A, subject to the requirements of Revenue Procedure 2025-28, by amending returns for tax years beginning after December 31, 2021. Larger taxpayers cannot amend those years, but may deduct their remaining unamortized domestic research and experimental costs from 2022 through 2024 either entirely in 2025 or ratably over 2025 and 2026. The IRS issued procedural guidance addressing these transition options in Revenue Procedure 2025-28, released on August 28, 2025. Taxpayers making the retroactive small business election generally must amend the affected returns, or file administrative adjustment requests in the case of partnerships subject to the centralized partnership audit regime, by the earlier of July 6, 2026, or the date the statute of limitations expires for the year in question. Section 174A also retains elective alternatives, including capitalization and amortization of domestic costs over a period of not less than sixty months, and a ten-year amortization election under Section 59(e).

How the Credit and the Deduction Interweave

The two provisions do not operate in isolation. They are connected through Section 280C(c), and the OBBBA changed that connection.

Section 280C(c) is an anti-double-benefit rule. A taxpayer is not permitted to claim a full deduction for research expenditures and also claim an undiminished credit on the same dollars. The taxpayer must choose one of two paths. The first path is to claim the full Section 41 credit and then reduce the Section 174A deduction, or the amount capitalized, by the amount of the credit. The second path is to make the Section 280C election, which allows the taxpayer to keep the full deduction in exchange for claiming a reduced credit, with the reduction tied to the maximum corporate tax rate.

For domestic costs, the practical effect of the TCJA capitalization regime substantially altered the historical Section 280C coordination mechanics because immediate expensing had been replaced with amortization. Beginning with the 2025 tax year, the OBBBA reinstates the pre-TCJA interaction. Any taxpayer claiming the research credit must once again work through the Section 280C analysis. The election itself is consequential and unforgiving in its timing. It is made at the top of Form 6765 on Item A, it must be made on an original, timely filed return including extensions, it cannot be made or changed on an amended return, and once made it is irrevocable for that tax year. The choice between the gross credit with a reduced deduction and the reduced credit with a full deduction is therefore a modeling exercise that must be completed before the return is filed, not after.

Form 6765 Compliance Requirements

Form 6765 is the vehicle for all of this. A taxpayer uses it to figure and claim the Section 41 credit, to make the Section 280C reduced credit election, and to elect and compute the payroll tax credit available to qualified small businesses.

The IRS finalized a substantially redesigned Form 6765 on February 11, 2025, following roughly eighteen months of stakeholder comment. It is the most significant revision to the form since the alternative simplified credit replaced the alternative incremental credit in 2009. Two items that were historically buried in the credit computation, the Section 280C election and the indication of controlled group membership, now appear as Items A and B at the very top of the form. The body of the form is organized into the regular credit, the alternative simplified credit, the payroll tax credit computation, and three reporting sections that deserve particular attention.

Section E, Other Information, is effective for tax years beginning in 2024 and applies to all filers. It requires the taxpayer to report the total number of business components that generated qualified research expenses, the amount of officers’ wages included in qualified wage expenses, whether the claim is consistent with the taxpayer’s historical filing position, and whether the ASC 730 directive is being used for any portion of the claim. It also asks about acquisitions, dispositions, and new categories of expenditures.

Section F, Qualified Research Expense Summary, consolidates the quantitative reporting of qualified research expenses.

Section G, Business Component Information, is the heart of the redesign and the most demanding part of the form. It calls for qualitative and quantitative detail for the business components underlying the claim. A taxpayer subject to Section G must report the business components that make up at least 80 percent of total qualified research expenses, listed in descending order by qualified research expense amount, and capped at 50 components. For each component, the taxpayer must supply descriptive information about the component and the research activities and expenses associated with it.

The effective date of Section G has shifted more than once, and practitioners should confirm the current position rather than rely on memory. As reflected in the Instructions for Form 6765 revised December 2025, and consistent with the IRS announcement in IR-2025-99 on October 1, 2025, Section G is optional for all filers for tax years beginning before 2026 and required for tax years beginning after 2025. When Section G becomes mandatory, two categories of taxpayers remain exempt from completing it. The first is qualified small business taxpayers, as defined in Section 41(h)(3), who elect the reduced payroll tax credit. The second is taxpayers whose total qualified research expenses are 1.5 million dollars or less, determined at the controlled group level, and whose gross receipts are 50 million dollars or less, determined under Section 448(c)(3). Because the IRS has postponed these reporting requirements more than once, practitioners should confirm the applicable filing-year requirements against the most current IRS instructions and announcements before filing.

Amended return claims carry an additional layer of substantiation. Since the 2021 Chief Counsel memorandum addressing valid research credit refund claims, a taxpayer claiming the credit on an amended return or administrative adjustment request has been required to identify the business components, the research activities performed, and the individuals who performed them, along with the information each sought to discover. The IRS has extended the transition period that gives taxpayers 45 days to perfect a deficient refund claim through January 10, 2027.

How Bookkeepers Should Set Up the Books to Track the Credit

The redesigned Form 6765 is, in practical terms, an instruction to capture research data contemporaneously and at the business component level. A claim assembled primarily from retrospective estimates at year end may face substantially greater scrutiny on examination, and it may not satisfy the new reporting format. The accounting records should be structured before the research happens, not reconstructed afterward. The following framework reflects sound practice.

• Establish a dedicated set of general ledger accounts, or a consistent system of project codes, classes, or cost centers, that isolates research and experimental costs from ordinary operating expenses. The objective is to be able to produce, directly from the ledger, a schedule of research costs by category and by project.
• Separate domestic and foreign research from the outset. This distinction now drives the timing of the deduction. Domestic costs are immediately deductible under Section 174A, while foreign costs must be capitalized and amortized over fifteen years under Section 174. The books should never commingle the two.
• Track qualified wages through a time-tracking discipline rather than estimates. The credit applies to wages for employees performing, directly supervising, or directly supporting qualified research, and the substantially all rule allows 100 percent of an employee’s wages to count when at least 80 percent of that employee’s services are qualified. Because Section E now asks specifically for officers’ wages, officer compensation included in the claim should be tagged separately within the payroll records.
• Maintain distinct accounts for the other qualified research expense categories. Supplies consumed in qualified research, amounts paid for cloud computing or leased computer time used in qualified research, and contract research costs should each have their own account. Contract research is subject to statutory percentage limitations, generally 65 percent of qualifying payments, with higher percentages for research consortia and for certain payments to small firms, universities, and federal laboratories, all subject to statutory exceptions and applicable-year rules. The underlying contracts should be retained, because the taxpayer must be able to demonstrate that it retained the financial risk and substantial rights to the research.
• Keep a separate amortization schedule, handled with the same rigor as a fixed asset register, for any capitalized foreign research and experimental costs and for any remaining unamortized 2022 through 2024 domestic costs being recovered under the OBBBA transition rules.
• Build a reconciliation between the book research and development figure, the Section 174A expenditure population, and the Section 41 qualified research expense population. These three numbers are related but not identical. Section 174 and 174A reach a broader set of costs than the Section 41 credit, and the gap between them should be documented and explainable. Where the financial statements rely on the ASC 730 book treatment of research costs, that linkage should be mapped as well, since the form asks whether the ASC 730 directive is used.

Documentation should be assembled as a contemporaneous record that ties activities to business components, including project descriptions, technical narratives, meeting notes, test results, and the payroll and expense detail that supports each figure. The reporting format of the new Form 6765 assumes this record already exists.

Why the Size of the Incentive Demands Due Diligence

These provisions are among the largest business tax expenditures in the federal code, and that fact should inform how seriously a taxpayer treats substantiation. The Joint Committee on Taxation estimates that the research credit will reduce federal revenues by approximately 188.9 billion dollars over fiscal years 2025 through 2029, placing it among the largest corporate and business-related tax expenditures in the federal code. Expensing of research costs is projected to reduce revenue by an additional 104.1 billion dollars over the same period.

When a provision moves that much revenue, it draws scrutiny. The research credit is, by the IRS’s own description, an item that is frequently reviewed on examination and that consumes significant resources for both the agency and the taxpayer. The redesign of Form 6765 is not a neutral administrative update. The IRS has stated that the revised form is intended to make reporting more consistent, to improve the information available for tax administration, and to manage examination resources more effectively. In plain terms, the agency is asking for more information at the time of filing precisely so that it can identify and challenge questionable claims more efficiently. The steady tightening of the rules, from the 2021 refund claim memorandum through the form redesign, reflects a sustained enforcement posture.

The conclusion for taxpayers and their advisors is straightforward. A research credit claim is only as strong as the records behind it. The combination of a more generous deduction under Section 174A, a reinstated Section 280C coordination, and a far more detailed Form 6765 means that the planning value of these incentives is real, but it is fully available only to taxpayers who can substantiate what they claim, component by component and dollar by dollar. The work of capturing that detail belongs in the books and records throughout the year. Treated that way, the credit and the deduction are a durable part of a sound tax strategy. Treated as a year-end estimate, they may create significant examination exposure.

Sources

• Internal Revenue Service, Research Credit. https://www.irs.gov/businesses/research-credit
• Internal Revenue Service, About Form 6765, Credit for Increasing Research Activities. https://www.irs.gov/forms-pubs/about-form-6765
• Internal Revenue Service, Instructions for Form 6765 (Rev. December 2025). https://www.irs.gov/instructions/i6765
• Internal Revenue Service, IRS extends the period for feedback on Form 6765 (IR-2025-99). https://www.irs.gov/newsroom/irs-extends-the-period-for-feedback-on-form-6765
• Congressional Research Service, The Federal Research and Development (R&D) Tax Credit, Report R48848, February 6, 2026. https://www.congress.gov/crs-product/R48848
• U.S. Congress, Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2025-2029, JCX-45-25, December 3, 2025. https://www.jct.gov/publications/2025/jcx-45-25/
• Carr, Riggs & Ingram, R&D Looks Different Now that the One Big Beautiful Bill Act Has Been Passed, November 17, 2025. https://www.criadv.com/insight/rd-tax-incentives-obbba/
• Grant Thornton, New Form 6765 reporting requirements. https://www.grantthornton.com/insights/alerts/tax/2025/insights/new-form-reporting-requirements
• Grant Thornton, Permanent full expensing for U.S. research in OBBBA. https://www.grantthornton.com/insights/alerts/tax/2025/insights/full-expensing-of-domestic-research
• BDO, IRS Issues Procedural Guidance on OBBBA Treatment of R&E Expenditures. https://www.bdo.com/insights/tax/irs-issues-procedural-guidance-on-obbba-treatment-of-r-and-e-expenditures
• KBKG, Research & Development Tax Credits. https://www.kbkg.com/research-tax-credits