Manufacturer R&D Considerations for 2025 and Beyond

Innovation is the lifeblood of manufacturing. As a result, manufacturers must conduct research and develop new products, enhancements and production efficiencies on a regular basis to keep up with — or stay ahead of — competitors. The Federal Credit for Increasing Research Expenses, often referred to as the R&D Credit, can help offset some of the expenses associated with these efforts. While most manufacturers are likely quite familiar with the R&D Credit, there are a few key updates that manufacturers should keep top of mind in 2025 and beyond.

New Disclosures for Credit Claims

In January 2025, the Internal Revenue Service (IRS) published the final version of the R&D Credit Form 6765 following its draft release in December 2024, and earlier June 2024 proposed version. Key updates to the form include three new Schedules: E, F and G. 

Schedule E

The first of the new schedules includes a series of questions that commonly arise during R&D audits. It also seeks to clarify the number of business components generating the claimed Qualified Research Expenses (QREs). 

Schedule F

Schedule F is required for manufacturers not completing the optional Schedule G. It is used to report total amounts of QREs by category and is nearly identical to the old version of the form. 

Schedule G

This schedule is optional to complete in 2024 but will be required for the 2025 tax year. It should be noted that Schedule G is mandatory for qualified small business taxpayers that elect to claim the research credit against payroll taxes as well as taxpayers that, on a controlled group basis, report $1.5 million or less of QREs and gross receipts of $50 million or less. 

Whether you are completing Schedule G this year or next, it requires taxpayers to list their research projects by business component, including a short description of what was sought to be discovered and the QREs that were incurred. While most manufacturers monitor the costs associated with their research efforts, they may be lacking in the crucial step of linking the expenses to specific projects or business components. As a result, now is the time for manufacturers to revisit their documentation process for tracking research projects and their associated costs, so that they will be prepared when the time comes to complete Schedule G.  

Capitalization of Research Expenses

There has been much speculation that Congress will alleviate the burden of Section 174, which requires research expenses to be capitalized and amortized for tax purposes. As of February 2025, Sec. 174 remains in effect and manufacturers must complete it regardless of whether an R&D credit is claimed. In fact, the IRS announced a new enforcement campaign in December 2024, and called out taxpayers who disregarded Sec. 174 and filed Form 8275, Disclosure Statement, indicating that they were waiting to see if laws would change. For now, manufacturers should keep an eye out for possible Sec. 174 legislation under the new administration, while continuing to fine tune their processes for accounting for research expenses under this provision.

Key Court Decisions

There were several recent court decisions involving the research credit, specifically involving funded research (Smith; System Technologies, Inc.; Meyer, Borgman, & Johnson, Inc.), the exclusion of research related to adaptations of an existing business component for a particular customer (Betz) and production of pilot/prototype models (Intermountain Electronics, Inc.). Manufacturers involved in…