February 25, 2025 R&D in Manufacturing: Considerations for the Future

Manufacturers can remain competitive and compliant by staying up to date with R&D advancements—including the new R&D Credit Form 6765.

By Kristin Kowalski, Partner at The Bonadio Group

Innovation is crucial to the success of manufacturing—whether that means launching new products, improving existing ones or enhancing production efficiency. As manufacturers strive to stay competitive, they are constantly engaged in research and development (R&D). The Federal Credit for Increasing Research Expenses, or R&D Credit, can help offset the costs associated with these efforts. While many manufacturers are familiar with the R&D Credit, it’s important they stay informed on new updates and amendments to ensure they are maximizing their benefits and remaining compliant.

R&D Credit Updates for 2025: What’s Changed

In January, the Internal Revenue Service (IRS) published the final revised R&D Credit Form 6765. The new form includes three additional Schedules: E, F, and G, which are designed to capture more detailed information, and is in effect for the 2024 tax year.

Schedule E consists of a series of questions aimed at gathering information on common issues seen during R&D audits. This schedule also identifies the number of business components contributing to the Qualified Research Expenses (QREs) being claimed.

Schedule G is optional for 2024, but starting in 2025, it becomes mandatory for many taxpayers. However, some may still be exempt, including qualified Small Business taxpayers who claim the research credit against payroll taxes, or taxpayers who report $1.5 million or less in QREs and have gross receipts of $50 million or less on a controlled group basis.

For those required to complete Schedule G, it’s now necessary to list research projects by business component, including a brief description of the research goal and the QREs incurred for each project and component. This level of detail was previously only required when filing amended R&D claims or during IRS inquiries.

Schedule F is required for filers who do not complete Schedule G. It reports QRE totals by category, and for the most part, it remains similar to previous reporting formats.

Impact of Section 174: Capitalization of Research Expenses

Under Section 174, which requires the capitalization and amortization of research expenses, manufacturers must continue to account for these costs over several years starting from tax years after December 31, 2021. Although there was hope for legislative changes or retroactive relief, Section 174 is still in effect. Manufacturers must comply with this rule, regardless of whether they are claiming the R&D Credit.

The IRS has also initiated an enforcement campaign focused on proper usage of Form 8275 (Disclosure Statement), allowing taxpayers to inform the IRS about positions they have a reasonable basis to assert. This can help avoid penalties for accuracy or underpayment. However, the IRS has clarified that Form 8275 should not be used to bypass valid tax rules, including Section 174.

As we move forward in 2025, manufacturers should stay vigilant for any updates related to Section 174 while refining their internal processes for tracking and capitalizing research expenses.

2024 R&D Credit Court Rulings: Key Takeaways

Several significant court decisions in 2024 have impacted R&D credit claims, particularly in areas such as funded research, excluding research tied to customer-specific adaptations of existing business components, and the creation of pilot or prototype models. Manufacturers engaged in these activities should review these rulings and adjust their credit methodologies accordingly.

Looking Ahead: Preparing for R&D Credit Changes

Now that we’re over a month into 2025, manufacturers should begin evaluating whether Schedule G will be required for their company. The criteria surrounding control groups and small businesses can be complex, so professional guidance may be necessary. If your company is likely to be affected by the new reporting requirements in Schedule G, it’s essential to revisit how you track research activities and their associated costs.

Many manufacturers are already monitoring their research expenses, but they may not be linking those costs to specific business components or projects. Even if Schedule G is optional, taking the time to improve documentation practices is always a good investment, ensuring your business is audit ready. Involving engineering and manufacturing teams in the process can uncover research activities that might have been overlooked.

If you find that your current documentation needs improvement or that compliance is uncertain, consider conducting a formal R&D or Section 174 study. This will help maximize potential tax benefits and ensure your company remains compliant with the latest regulatory changes.

About the Author:
Kristin Kowalski is a Partner in The Bonadio Group’s Tax practice. She has over a decade of experience providing tax compliance, consulting and advisory services to multi-state corporations and flow-through clients in the manufacturing, technology, service and real estate industries. Areas of technical expertise include inbound international organizations, tax credits, accounting for income taxes and transaction planning. Kristin is also co-leader of Bonadio’s cannabis and industrial hemp team.

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