Top 10 Things Tax Teams Need to Know About R&D Tax Credits in 2026

The R&D tax credit landscape has fundamentally shifted. With the passage of the One Big Beautiful Bill Act (OBBBA) in July 2025, the restoration of domestic R&D expensing, and Form 6765 Section G now mandatory for most taxpayers, 2026 brings both significant opportunities and heightened compliance requirements. Whether you’re a startup or a Fortune 500 company, understanding these changes is critical to maximizing your benefits while maintaining audit-ready documentation.

1. Section 174 Has Been Fixed: Domestic R&D Expensing is Back

The most significant development is the restoration of immediate expensing for domestic research and experimental expenditures through new Section 174A. After three years of mandatory capitalization and amortization (2022-2024), companies can now deduct domestic R&D costs in the year incurred for tax years beginning after December 31, 2024.

Key Points:

• Domestic R&D expenses can be immediately deducted starting in 2025
• Foreign R&D expenses must still be amortized over 15 years
• Companies can elect to deduct unamortized domestic R&D expenses from 2022-2024 either fully in 2025 or split between 2025 and 2026
• Small businesses (average annual gross receipts under $31 million) can amend 2022-2024 returns to retroactively apply expensing, with amended returns due by July 6, 2026

 Action Step: Work with your tax team to model the cash flow impact of different acceleration options and determine whether retroactive amendments make sense for your organization. Consider how OBBBA impacts your R&D tax planning.

2. Form 6765 Section G Is Now Mandatory

After being optional for 2025, Section G becomes mandatory for tax year 2026 for most filers. This section requires detailed business component-level reporting, representing the most significant change to Form 6765 in over a decade.

Section G Requirements:

• Report the top 80% of Qualified Research Expenses across no more than 50 business components in descending order
• Identify the type of each business component (product, process, software, technique, formula, or invention)
• Provide QRE breakdowns by wages (by job function: Direct Research, Direct Supervision, Direct Support), supplies, and contract research for each component
• Describe the information sought to be discovered through research activities

Exemptions: Qualified small business taxpayers electing the payroll tax credit and taxpayers with QREs of $1.5 million or less and gross receipts of $50 million or less (measured at control group level) may continue to skip Section G.

Action Step: Develop a business component strategy now if you haven’t already. Start tracking costs at the business component level and classify wage expenses by job function throughout the year rather than scrambling at tax time.

3. Coordination Between Section 174A and Section 41 Is Critical

With domestic expensing restored, the coordination rules between Section 174 and Section 41 are back in play. Companies must reduce either current-year R&D expenditures, reduce capitalized amounts, or make a Section 280C election to claim the reduced credit.

Action Step: Ensure your tax team understands how to properly coordinate Section 174A expensing with Section 41 credit calculations. Model different scenarios to determine the optimal approach for your organization.

4. IRS Enforcement Continues Despite Staffing Reductions

While the IRS has experienced significant staffing cuts (with Large Business & International down approximately 25% and Appeals down 27%), R&D credit examinations continue. The termination of the MITRE contract has changed the IRS’s examination approach, with examiners now focusing more heavily on documentation-based challenges.

What This Means:

• Expect IRS to rely on insufficient substantiation arguments rather than technical merit
• Sampling methodologies may be disallowed
• Documentation will be prioritized over interviews and affidavits
• IRS has won 11 of the last 14 R&D tax credit cases

Action Step: Ensure your R&D credit claims are bulletproof with clear contemporaneous documentation, data-backed calculations, and audit-ready files. Review recent R&D tax credit cases to understand current IRS positions.

5. Documentation Requirements Have Never Been Higher

The Kyocera case crystallized the IRS’s position: interviews alone are insufficient. Courts have repeatedly emphasized the need for contemporaneous documentation demonstrating technical uncertainty and experimentation.

Required Documentation:

• Design documents and technical drawings
• Test results and experimentation records
• Project tracking data (JIRA, GitHub, etc.)
• Engineering meeting notes and technical emails
• Evidence of technical uncertainties and process of experimentation

Action Step: Implement a real-time documentation process that captures research activities as they occur. Don’t wait until tax time to reconstruct what happened.

6. The Process of Experimentation Standard Is Stricter Than Ever

Following cases like Little Sandy Coal, the IRS requires proof that at least 80% of research efforts followed a structured process of experimentation. Companies must demonstrate the scientific method (hypothesis, testing, iteration) when developing new products or processes.

Action Step: Document your experimentation process clearly, showing alternative approaches evaluated, systematic testing conducted, and iterative refinement based on results.

7. Internal Use Software Faces Additional Scrutiny

Software development activities continue to be treated as research costs, but internal use software (IUS) faces three additional tests beyond the standard four-part test:

• The software cannot be commercially available
• It must be intended to result in substantial and economically significant improvements
• The project must involve significant economic risk

Important: Distinguish between technical risk (which qualifies) and business risk such as funding delays or training issues (which does not qualify).

Action Step: For cloud computing and software development projects, ensure documentation addresses all IUS tests and clearly distinguishes technical from business uncertainty.

8. Fast Track Settlement Is Getting More Attention

A July 2025 LB&I memo now mandates that exam teams participate in Fast Track Settlement or explain to the Deputy Commissioner why they declined. This creates new opportunities for taxpayers to resolve disputes efficiently.

Fast Track Benefits:

• Completed within 120 days
• Considers hazards of litigation
• Allows partial qualification of projects
• Can proceed to regular Appeals if unsuccessful

Action Step: If facing an examination, gauge the exam team’s willingness to compromise before agreeing to Fast Track. Consider it especially for cases where both sides have weaknesses.

9. Refund Claims Face Extended Review Periods

The IRS extended the transition period for refund claim substantiation through January 10, 2027. Claims must include detailed business component information, activity descriptions, and QRE breakdowns (essentially a preview of Section G requirements).

Action Step: Before filing refund claims, ensure you can provide complete documentation supporting business components, technical uncertainties, and processes of experimentation. Review the Park-Ohio case for insights into IRS expectations.

10. Technology and AI Are Transforming R&D Credit Processes

Forward-thinking companies are leveraging technology they already own (such as Microsoft Teams and Slack) to streamline SME engagement and documentation. Additionally, AI tools deployed behind the firewall are helping classify activities, analyze JIRA data, and identify patterns indicating experimentation.

Best Practices:

• Create collaboration hubs with simple Planner tasks and video training
• Provide documentation mapping checklists
• Use Power BI dashboards for real-time progress tracking
• Leverage existing data sources (JIRA, GitHub, PLM systems)
• Be aware of AI risks and how the IRS uses AI

Action Step: Audit your current R&D credit process. Identify pain points that reduce SME response rates or documentation quality. Consider the MASSIE Method for user-experience-focused approaches.

Bonus

11. Don’t Forget State R&D Credits

Thirty-nine states continue to offer R&D credits, with several states making significant changes:

• Connecticut expanded eligibility for single-member LLCs
• California introduced new ASC election method
• Iowa replaced its credit with more restrictive program
• Minnesota made credit partially refundable (25% starting 2026)
• Texas consolidated incentives with enhanced rates
• Virginia R&D credits expired for 2025+

Action Step: Review state-specific requirements and ensure your documentation supports both federal and state claims.

Don’t Get Caught Off Guard in 2026

2026 represents both tremendous opportunity and complexity for R&D tax credits. The restoration of domestic expensing through OBBBA provides significant cash flow benefits, but the mandatory Section G reporting, heightened documentation standards, and continued IRS scrutiny mean companies must be more prepared than ever.

Tax teams that are proactive (not reactive) will:

• Maximize cash flow benefits from Section 174A changes
• Ensure compliance with mandatory Section G reporting
• Build audit-ready documentation
• Leverage technology to improve SME engagement
• Defend their credits successfully if examined

Use our R&D Tax Credit Compliance Checklist to ensure your organization is ready for 2026, or schedule a consultation with MASSIE’s tax experts to discuss your specific situation.

Jason Massie, CPA, Esq.

As the Founder and President of MASSIE R&D Tax Credits, Jason is responsible for the quality, consistency, and integrity of our services. His strategic vision and leadership drive innovation within the company, encouraging collaboration and ne...