For businesses investing in innovation, the Research & Development (R&D) tax credit is a powerful incentive—one that helps offset payroll tax liabilities and rewards companies for pushing boundaries. But as with any tax incentive, claiming it requires precision, compliance, and the right documentation.
The IRS has been tightening its grip on R&D tax credit claims, introducing stricter reporting requirements in recent years to reduce dubious claims. However, in response to concerns from businesses and tax professionals, the IRS has extended the transition period for perfecting R&D credit claims through January 10, 2026.
This extension gives businesses more time to comply with updated documentation standards—and more breathing room to ensure their claims are airtight. So, what does this mean for your business? Let’s break it down.
What’s Changing with R&D Tax Credit Claims?
Back in 2021, the IRS upped the ante on R&D tax credit documentation. Claimants were required to provide a detailed breakdown of:
- Business components tied to the claim
- Research activities undertaken for each component
- Who performed the research and what they sought to discover
- Qualified expenses (wages, supplies, and contract research)
These requirements were meant to reduce fraudulent claims, but they also added complexity for startups and SMBs legitimately pursuing R&D tax credits.
Fast forward to 2024, and the IRS has relaxed some of these requirements for claims postmarked after June 18, 2024. Now, businesses must provide:
- A list of all business components tied to the R&D claim
- A description of research activities for each component
- A summary of qualified expenses (wages, supplies, and contract research)
This streamlined approach makes compliance easier—while still ensuring businesses provide enough detail to substantiate their claims.
What Does the Transition Period Extension Mean?
The IRS has twice extended the transition period, first pushing the deadline to January 10, 2025, and now further extending it to January 10, 2026.
Why is this a win for businesses?
- More time to adjust – If you’re still navigating the new R&D tax credit requirements, this extension gives you two extra years to fine-tune your documentation process.
- Fewer rejected claims – The extra time allows businesses to work with tax professionals to “perfect” their claims before facing an IRS determination.
- More clarity – As the IRS continues issuing guidance, businesses can gain a clearer understanding of how to comply without overcomplicating their claims.
Essentially, this extension means that while the new documentation rules are here to stay, businesses have more time to get it right—without facing immediate penalties for non-compliance.
How to Claim the R&D Tax Credit Under the New Rules
With the updated IRS requirements and extended transition period, here’s a step-by-step guide to claiming the R&D tax credit correctly:
1. Determine Your Eligibility
To qualify, your business must:
- Have less than $5 million in gross receipts for the tax year
- Have earned gross receipts for no more than five years
- Be conducting qualifying research activities (i.e., work that involves technical innovation, experimentation, and problem-solving)
2. Identify Qualified Research Expenses (QREs)
The IRS recognizes three key categories of R&D expenses:
- Wages paid to employees conducting, supervising, or supporting R&D
- Supplies used in the R&D process
- Contract research costs paid to external vendors assisting in R&D
Ineligible expenses include advertising, employee training, research conducted outside the U.S., and routine quality control testing.
3. Gather and Document Your R&D Activities
Proper documentation is critical for claiming the R&D tax credit successfully. Keep detailed records, including:
- Payroll records for employees involved in R&D
- Project documentation (engineering notes, test results, lab reports)
- Invoices for qualifying R&D expenses
Pro tip: Even after receiving your credit, keep all records on file—the IRS can audit R&D tax credit claims years after approval.
4. File Form 6765
To officially claim the credit, complete Form 6765 (Credit for Increasing Research Activities) and submit it with your federal tax return. This form determines the total amount of credit your business qualifies for and how much can be applied against your payroll tax liabilities. Next, take the amount from Form 6765, line 44, and report it on Form 8974 (Qualified Small Business Payroll Tax Credit for Increasing Research Activities)..
5. Use Your Credit Strategically
- Apply up to $250,000 of your R&D credit toward FICA payroll tax
- Apply up to $250,000 toward Medicare payroll tax
- Any unused credit can be carried forward for up to 20 years
Why Act Now?
The IRS transition period extension is a golden opportunity for startups and SMBs to refine their R&D credit claims without the immediate risk of rejection or penalties.
If you’ve claimed R&D tax credits before – Use this time to review past claims and ensure you meet the new documentation standards.
If you’re new to R&D tax credits – Take advantage of the Inflation Reduction Act’s increased ceiling ($500,000 per year) and start maximizing your tax savings.
Final Takeaway
Innovation is a journey, not a destination—and so is navigating the R&D tax credit landscape. With the right guidance and preparation, your business can tap into these lucrative incentives with confidence.
Need help ensuring your claim meets IRS standards? Ravix Group is here to guide you every step of the way. From accounting support to audit readiness, our experts help entrepreneurs unlock the full potential of the R&D tax credit—without the headaches.
