AI R&D Tax Credit Tools vs. Defensible Studies: 5 Questions to Ask Before You File (Form 6765)

The episode explains that R&D tax credit software and AI tools can quickly organize financial data and produce a rough estimate, but often fail to justify why costs qualify or to provide the documentation the IRS increasingly expects, especially with evolving business-component-level reporting on Form 6765. It contrasts a simple software output with a holistic credit study that includes forms, a credit summary, methodology memo, and narratives tying costs to specific projects, uncertainties, experimentation, and source records. Using contract spend as an example, it highlights pitfalls like the 65% contractor adjustment, offshore labor hidden behind a US invoice, and customer-funded work affecting rights and risk.

Does Your Software Work Qualify for the R&D Tax Credit? Use the Count/Review/Cut Buckets

This episode explains that the question “Does our work qualify for the R&D tax credit?” is too vague and should be replaced by sorting work and spend into three buckets: count, review, and cut. Using a US software team example, he emphasizes qualifying is based on activities tied to specific business components (projects) involving technical uncertainty and experimentation—not job titles—so engineering payroll starts in review until activities are clarified. He highlights review areas that require fact analysis, including contractors (often limited to 65% and dependent on contract terms), cloud/computer rental tied to development, and separating US vs offshore work (offshore generally excluded). He recommends cutting routine maintenance, “peanut butter” percentage estimates, offshore costs, and customer-funded work where the customer bears risk/owns rights, and suggests documenting business components and technical issues throughout the year.

Section 174 vs. Section 41: The 4 “Lanes” to Plan Your 2025 R&D Tax Credit (and Section G + Payroll Election)

The episode explains that recent changes to Section 174 (deduction timing for research expenditures) are often confused with Section 41 (the R&D tax credit), causing missed tax planning and cash flow issues. It outlines four “lanes” for the 2025 filing season: (1) Section 174 deductions—domestic R&E is currently deductible again for tax years beginning after Dec. 31, 2024 (2025), while foreign research remains on slower amortization with transition complexity; (2) Section 41 credit qualification still depends on the four-part test; (3) Form 6765 Section G increases required business-component-level detail, optional in 2025 but mandatory for most in 2026 with exceptions; and (4) the payroll tax election for qualified small businesses, which can materially improve startup cash flow if timely elected. It stresses separating U.S. vs foreign work.