The IRS has significantly expanded the reporting requirements for the research and development (R&D) tax credit, beginning with tax year 2025. These changes aim to enhance transparency and consistency in claiming the R&D tax credit. The additional reporting and disclosure requirements are listed below.
Mandatory Disclosure of Business Component Information
Taxpayers must complete detailed information for each business component generating research expenditures. A business component within the research and development context is generally a product, process, or potentially software development that a business dedicates R&D expenditures towards.
The information that will be required to be disclosed within the tax return incudes:
- The name or unique identifier of the business component
- The type of business component (e.g., product, process)
- A description of the experimentation process
- A breakdown of research expenses by category, including wages, supplies, and contract research expenses for each business component
This detailed reporting is required for the business components that account for 80% of total research projects or up to the top 50 business components, whichever is smaller. Taxpayers with total qualified research expenditures equal to or less than $1.5 million and gross receipts equal to or less than $50 million are exempt from this additional reporting requirement.
Additional Information
An additional section is required to disclose more specific information relating to the current year’s R&D. These additional disclosures include:
- The total number of business components generating research expenditures
- The total amount of officers' wages included as wages for the R&D tax credit calculation
- Details of any acquisitions or dispositions of major portions of a trade or business during the tax year
Steps Your Business Should Take Now in Preparation for the R&D Tax Credit Reporting Changes
The above changes are effective for the 2025 tax year for returns filed in 2026. Your business should prepare now for the additional reporting requirements by ensuring your current internal tracking, including documentation of research and development efforts, provides enough details for the reporting to be completed accurately.
Additionally, begin to coordinate with your team of external advisors to discuss the changes and how your business can begin to adapt and improve internal documentation efforts. If you have any questions or would like to discuss how your business can prepare for these changes, please contact us.