The Research & Development (R&D) tax credit has long been a cornerstone of U.S. innovation policy, incentivizing businesses to invest in technological advancements and maintain global competitiveness. As of April 2025, several legislative initiatives aim to expand and enhance this credit, addressing both longstanding challenges and emerging opportunities.
The Current Landscape
Under Internal Revenue Code Section 41, the R&D tax credit allows businesses to offset a portion of their research expenses, promoting domestic innovation. However, changes introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, effective from 2022, have required companies to amortize R&D expenses over five years, rather than deducting them immediately. This shift has increased tax liabilities for many firms, prompting calls for reform.
Legislative Efforts to Enhance the R&D Tax Credit
1. Fostering Innovation and Research to Strengthen Tomorrow (FIRST) Act
Introduced by Congresswoman Claudia Tenney, the FIRST Act proposes significant enhancements to the R&D tax credit:
- Doubling the Traditional Credit: Increasing the rate from 20% to 40% for established companies.
- Enhancing the Alternative Simplified Credit (ASC): Raising the rate from 14% to 28%.
- Supporting New Entrants: Boosting the credit for firms with limited research history from 6% to 14%. These changes aim to make the U.S. more competitive globally by encouraging greater investment in R&D activities.
2. American Innovation and Jobs Act
Reintroduced by Senators Maggie Hassan and Todd Young, this bipartisan bill seeks to:
- Restore Immediate Expensing: Allowing businesses to deduct R&D expenses in the year incurred, reversing the TCJA’s amortization requirement.
- Expand Support for Startups: Doubling the refundable R&D credit cap from $250,000 to $500,000, with plans to increase it to $750,000 over the next decade.
- Broaden Eligibility: Increasing the gross receipts threshold for startups from $5 million to $15 million and extending the period they can claim the credit from 5 to 8 years.
3. FORWARD Act
Senator Chris Coons introduced the FORWARD Act to further refine the R&D tax credit by:
- Including Employee Training Expenses: Expanding the definition of qualified R&D expenses to encompass wages paid for employee training related to research activities.
This inclusion recognizes the importance of workforce development in driving innovation.
4. American Innovation and R&D Competitiveness Act of 2025
Sponsored by Representatives Ron Estes and Jon Larson, this act aims to:
- Retroactively Reinstate Full Expensing: Allowing businesses to deduct R&D expenses immediately, effective from 2022.
However, due to budgetary constraints and legislative hurdles, the bill’s passage remains uncertain.
Navigating Compliance: IRS Form 6765 Revisions
The IRS has proposed changes to Form 6765, used to claim the R&D tax credit, effective for the 2024 tax year. These revisions would require:
- Detailed Project Descriptions: Including objectives, uncertainties, and experimentation processes.
- Comprehensive Documentation: Substantiating the nexus between research activities and business components.
While aimed at enhancing transparency, these changes have raised concerns about increased administrative burdens, especially for small businesses.
Conclusion
The evolving landscape of R&D tax credits reflects a concerted effort to bolster American innovation. While proposed legislative changes offer promising enhancements, businesses must stay informed and prepared to adapt to new compliance requirements. Engaging with tax professionals such as CSSI and monitoring legislative developments will be crucial in maximizing the benefits of R&D incentives. Contact us today to maximize your R&D Tax Credits!
