R&D Tax Credits You May Have Missed in 2025: A Q1 Review 

For many businesses, the start of a new year brings an opportunity to review the previous year’s financial performance and identify areas for improvement. Yet one of the most valuable tax incentives available to American companies often goes unclaimed simply because business owners do not realize their activities qualify. The Research and Development tax credit has been part of the tax code since 1981, but misconceptions about who qualifies and what activities count as research continue to leave substantial money on the table. With recent legislative changes creating new opportunities to capture past credits and the evolving IRS documentation requirements changing how claims must be structured, Q1 of 2026 represents a critical window for companies to conduct a thorough R&D credit review. 

The One Big Beautiful Bill Act, passed in July 2025, fundamentally changed how businesses treat research expenses. After several years of required amortization that reduced cash flow and complicated tax planning, companies can once again immediately expense domestic R&D costs starting with the 2025 tax year. This shift not only improves cash flow going forward but also creates opportunities to reclaim value from prior years through amended returns. Source: https://leyton.com/us/rd-tax-credit-2025/. For businesses with average annual gross receipts under $31 million over the 2022 through 2024 period, the law permits retroactive application of immediate expensing rules, potentially generating significant refunds. 

Activities That Qualify More Often Than You Think 

One of the biggest barriers to R&D credit claims is the persistent belief that only companies with laboratory scientists or pharmaceutical researchers can qualify. While life sciences and biotech firms certainly represent a significant portion of R&D credit claimants, the credit applies across industries far more broadly than most business owners realize. The IRS uses a four-part test to determine qualifying research, and none of these requirements mention white lab coats or advanced degrees. 

Qualified research must involve developing or improving a business component, which includes products, processes, computer software, techniques, or formulas. The activity must rely on principles of physical or biological sciences, engineering, or computer science. The research must involve a process of experimentation that evaluates alternatives for achieving the intended result. Finally, the purpose must be to eliminate uncertainty about the development or improvement of a business component. Software development that involves solving technical uncertainties about functionality, performance, or reliability routinely qualifies, even when the work happens in typical office environments rather than formal research facilities. 

Manufacturing companies frequently overlook R&D credits despite engaging in substantial qualifying activities. When a manufacturer develops new processes to improve production efficiency, reduce defects, or integrate new equipment into existing systems, they may be conducting qualified research. The key is whether technical uncertainty existed and whether the company engaged in systematic evaluation of alternatives. A manufacturer that spent months testing different configurations to optimize a production line, documented the technical challenges, and evaluated multiple approaches likely has qualifying research expenses even if they never thought of the work in those terms. 

Architecture and engineering firms represent another industry where R&D credits remain significantly underutilized. When firms design solutions for unique technical challenges, develop innovative approaches to meet building codes or structural requirements, or solve problems where standard solutions do not exist, they are often conducting qualified research. The work does not need to be groundbreaking in the academic sense. It simply needs to involve technical uncertainty that required experimentation or evaluation of alternatives. A recent analysis by accounting firms specializing in R&D credits found that many architecture and engineering companies sit on substantial unclaimed credits simply because they do not realize their design work qualifies. 

Small software companies and SaaS businesses routinely qualify for R&D credits but often fail to claim them during their early years when cash flow benefits would be most valuable. Developing new features, improving performance, fixing bugs that require significant investigation and testing, or integrating with third-party systems all potentially qualify. The IRS does not require that your software be revolutionary or that no similar software exists elsewhere. The question is whether your development team faced technical uncertainty about how to achieve desired functionality and engaged in systematic evaluation of alternatives. For startups that do not yet have taxable income, qualified small businesses can use up to $500,000 of R&D credits annually to offset payroll taxes, providing real cash benefits even in pre-profit years. Source: https://www.vjmglobal.com/blog/understanding-rd-tax-credit-changes. 

Common Activities Often Overlooked 

Beyond entire industries that underutilize R&D credits, specific activities within otherwise active claimants frequently go unreported. Many companies that claim R&D credits for their primary product development work fail to capture credits for internal tool development. Software tools created to improve internal processes, automate workflows, or solve operational challenges can qualify for R&D credits if their development involved technical uncertainty and experimentation. The fact that the software serves internal purposes rather than being sold to customers does not disqualify it, contrary to what many businesses assume. 

Process improvement initiatives across all industries often meet the qualified research definition but go unclaimed because companies do not frame them in R&D terms. When a business develops new methods to reduce waste, improve quality, increase speed, or reduce costs through technical rather than managerial changes, qualified research may be occurring. The key distinction is whether the improvements required evaluating technical alternatives and solving technical problems rather than simply implementing existing known solutions. A company that tested multiple formulations to improve product durability, evaluated different manufacturing parameters to reduce defects, or developed automation systems to improve consistency has potentially qualifying activities. 

Prototype development and testing cycles represent prime R&D activity but often lack proper documentation to support credit claims. When companies build prototypes, test them, identify issues, modify the design, and test again, they are engaging in the systematic experimentation that the IRS requires. The challenge is that without contemporaneous records documenting what was tested, what results were observed, and how those results informed subsequent iterations, the credit claim becomes difficult to defend. Companies focused on getting products to market often view documentation as overhead rather than recognizing its role in supporting valuable tax credits. 

Supply chain integration projects increasingly involve qualifying research as companies adopt new technologies or connect disparate systems. When businesses implement new enterprise software, integrate IoT devices, or develop custom interfaces between systems, they often face substantial technical uncertainty about how components will work together. Time spent troubleshooting integration issues, testing different approaches, and developing workarounds for compatibility problems may qualify for R&D credits. The fact that the work involves purchased software or standard components does not disqualify it if your team faced uncertainty about how to make everything work together and engaged in systematic problem solving. 

The New Documentation Reality 

While 2025 activities and prior year amendments represent valuable opportunities, companies must understand that the IRS has significantly elevated documentation standards for R&D credit claims. The 2024 update to Form 6765 introduced new disclosure requirements that reflect increased scrutiny and higher expectations for substantiation. For companies with qualified research expenses exceeding $1.5 million, Section G of Form 6765 now requires detailed project-level reporting that was previously optional or handled through less formal documentation. Source: https://kahnlitwin.com/blogs/tax-blog/new-irs-rules-for-r-d-tax-credit-claims-what-business-owners-need-to-know-for-2025. 

The new requirements include identifying specific business components that were the subject of research, describing the information sought to be discovered through the research, and providing a detailed breakdown of qualified research expenses by business component. This represents a substantial shift from past practices where many companies claimed credits based on general percentages of payroll for technical employees without maintaining detailed project-level records. Court cases like Harper and Premier Tech have reinforced that vague or incomplete documentation can lead to IRS challenges regardless of whether qualifying activities actually occurred. 

For companies planning to claim R&D credits for 2025 or amend prior years, Q1 of 2026 is the time to ensure documentation meets current standards. This means identifying specific projects or initiatives that involved qualified research, documenting the technical uncertainty that existed at the project’s outset, describing the process of experimentation or evaluation of alternatives that was undertaken, and maintaining records that tie costs to specific projects. Employee time tracking becomes particularly important, as wages represent the largest component of most R&D credit calculations. Companies that lack contemporaneous time records face an uphill battle defending their credit claims if examined. 

The documentation burden may seem daunting, but it serves a legitimate purpose. The IRS has observed aggressive and sometimes inappropriate R&D credit claims in recent years, leading to increased audit activity and higher standards for all taxpayers. Companies that maintain solid documentation throughout the year, rather than trying to reconstruct it after the fact, find the credit claim process straightforward. Those that wait until tax time to think about documentation face substantial challenges assembling defensible support for their positions. 

State Credits Create Additional Opportunities 

While federal R&D credits receive the most attention, 37 states now offer their own R&D tax credit programs that provide additional value. State credits can often be claimed in addition to federal credits, and in many cases the state credit calculations build directly from federal qualified research expenses, making the incremental work minimal once federal documentation is complete. State credits vary significantly in their structure, with some offering refundable credits that provide cash even without state tax liability, while others provide only nonrefundable credits that can reduce state taxes owed. Source: https://www.taxtaker.com/blog/the-2025-guide-to-state-r-d-tax-credits. 

California offers one of the most generous state R&D credit programs, though it comes with specific rules about qualifying research activities. Massachusetts, New York, and Texas also provide substantial state R&D credits. Some states like Michigan recently reintroduced R&D credits after periods where they were unavailable, creating new opportunities for businesses operating in those jurisdictions. Effective January 1, 2025, Michigan allows large businesses to claim 3% of R&D expenses up to a base amount and 10% on expenses exceeding that base, with a $2 million annual cap, while small businesses receive a 3% credit up to base and 15% above, capped at $250,000 annually. 

The state credit landscape creates complexity for multi-state companies that must determine where their R&D activities occurred and how to allocate costs across jurisdictions. Different states have different conformity dates to federal tax law, meaning some states may not have adopted the 2025 changes to R&D expensing rules. This can create situations where federal and state treatment of research expenses diverges, requiring careful attention to ensure compliance in all jurisdictions while maximizing available credits. 

Taking Action in Q1 

The combination of new expensing rules, opportunities for retroactive amendments, heightened documentation requirements, and the imminent tax filing season makes Q1 of 2026 a critical period for R&D credit review. Companies should start by conducting an honest assessment of their 2025 activities to identify potential qualifying research. This means looking beyond formal R&D departments to consider engineering, product development, process improvement, and technical problem-solving activities across the organization. 

For companies that have never claimed R&D credits, a review of prior years becomes valuable. The statute of limitations typically allows amended returns for the past three years. Small businesses that qualify for retroactive treatment under the OBBBA have until July 6, 2026 to elect immediate expensing for 2022 through 2024, potentially generating refunds from those years. Source: https://www.taxtaker.com/blog/how-to-claim-missed-r-d-tax-credits-and-get-refunds-in-2025. Even larger companies that cannot take advantage of retroactive expensing may find they have unclaimed credits from qualifying activities in those years. 

Building systems to properly document R&D activities going forward represents an equally important Q1 initiative. This includes establishing project codes that allow time and expense tracking at the project level, implementing time tracking systems that capture both direct R&D time and time spent in qualified support activities, creating processes for documenting technical uncertainties and experimentation at project initiation, and maintaining records of project outcomes and how technical challenges were resolved. These systems need not be burdensome, but they must be contemporaneous and systematic rather than reconstructed after the fact. 

The Role of Specialized Support 

R&D credit claims have become increasingly technical and require specialized expertise to execute properly. While some companies maintain the internal resources to identify qualifying activities, document them appropriately, calculate the credit, and defend their positions if examined, many find that partnering with firms that specialize in this work provides better outcomes with less internal burden. The calculation methodology alone involves choosing between Regular Credit and Alternative Simplified Credit methods, properly computing base amounts, categorizing and allocating expenses correctly, and ensuring consistency with other tax positions. 

Escalon works with growing companies to maintain the organized financial records and project tracking systems that make R&D credit claims straightforward. When financial data is properly categorized throughout the year and project costs are tracked systematically, the incremental work to support an R&D credit claim decreases significantly. Firms with deep tax expertise can also identify qualifying activities that companies may not recognize on their own, based on experience working with similar businesses across industries. This outside perspective often uncovers credit opportunities that internal teams miss simply because they are too close to the work to recognize it as qualified research. 

Moving Forward with Confidence 

The R&D tax credit represents one of the most valuable incentives available to American businesses, yet it remains significantly underutilized. Companies that take time in Q1 of 2026 to review their 2025 activities, consider opportunities from prior years, and establish systems for proper documentation going forward can capture substantial value. With recent legislative changes restoring immediate expensing and creating retroactive opportunities, combined with heightened IRS scrutiny that demands better documentation, this Q1 represents a unique moment for businesses to get their R&D credit strategy right. The companies that invest this time will see returns not just in their 2025 tax position but in building a foundation for capturing these credits consistently in future years.