Stronger Reporting Looms: How CPAs and Taxpayers Should Prepare for Section G

The R&D Tax Credit has long been one of the most powerful innovation-driven incentives in the tax code. With the restoration of immediate domestic research expensing under Section 174A through the One Big Beautiful Bill Act (OBBBA), the R&D Credit is likely to see even greater use in the coming filing seasons. While the core eligibility rules and definitions of qualified research expenses (QREs) have not changed, the reporting landscape has shifted, particularly with the introduction of a detailed Section G on the redesigned Form 6765.

For many companies, the R&D credit has historically been a year-end compliance exercise layered on: gather payroll and expense data, apply a reasonable allocation methodology, and calculate the credit. Section G changes that equation. While Section G has been optional in 2024 and will be optional in 2025 as indicated in IR 2025-99, many taxpayers will be required to provide detailed project-level data in tax year 2026. This change raises the bar for documentation and forces companies to rethink their recordkeeping practices. Taxpayers and their advisors must treat 2025 as a transition year and use this opportunity to build robust systems and processes that will meet the forthcoming compliance expectations.

Why Section G Was Introduced

Over the past few years, courts have pushed the IRS on the level of specificity required for R&D credit refund claims. In Harper v. United States, the IRS challenged a taxpayer’s refund claims for lacking sufficient detail. Still, the court declined to accept the IRS’s after-the-fact specificity argument, even after the original Form 6765 was satisfied and the IRS began an exam of the claim. Responding to this dynamic, the IRS released Memorandum 20214101F, instructing IRS agents to reject R&D Credit refund claims that do not include:

• Clear identification of all business components to which the credit claim relates.
• For each element, a description of research activities, the individuals involved, and the necessary information.
• A breakdown of qualified wage, supply, and contract research expense amounts.

While the information required has evolved since its initial release, this guidance effectively previewed the changes now seen in Section G of Form 6765.

Who Must Complete Section G?

While all taxpayers should expect heightened scrutiny, the requirement to file Section G is not universal. Additionally, even though Section G is optional for the 2025 tax year, the obligation to document and substantiate the claim still exists. In the future, taxpayers with less than $1.5 million in QREs and under $50 million in gross receipts, as well as those electing to apply the credit against payroll taxes, are not required to complete Section G. For larger taxpayers and those with more complex R&D portfolios, Section G is now a non-negotiable element of compliance.

Why This Matters for CPAs and Taxpayers

Even though Section G is optional in 2025, taxpayers who fail to prepare will be at a severe disadvantage in 2026. Taxpayers who cannot tie their wage, supply, and contract research expenses to specific projects risk having their claims delayed or denied. Some approaches taxpayers have used in the past, such as relying on percentages of cost of goods sold, applying blanket allocations for scrap, or using high-level estimates, will not withstand scrutiny.

Building Sustainable Processes

The compliance burden is real, but the work can be managed with smart systems. The key is to integrate R&D tracking into existing business processes rather than layering it on at year-end. Companies should treat 2025 as a rehearsal year to test methodologies, refine processes, and identify gaps before the requirement becomes mandatory. Practical steps include:

• Identify business components contemporaneously. Taxpayers should create and maintain a current list of projects that qualify as business components during the year.
• Revisit methodologies. The Cohan rule still allows for estimates, but only when supported by credible evidence that research actually occurred. Unsupported percentages will not suffice.
• Employee tracking: Wages should be allocated through time records or supported estimates. For companies without time-tracking systems, the company should establish a cadence for contemporaneously logging research efforts. For staff engaged in multiple projects, weekly or biweekly logs may make sense. For those focused on only one or two projects, monthly or quarterly documentation may be sufficient. The methodology should be tailored to the business.
• Contemporaneous documentation: Encourage employees to keep notes, design documents, or progress reports during the year. This provides both audit protection and easier year-end compilation.
• System enhancements: If expenses are currently booked to a general R&D account, consider adding a field in the accounting system to tag costs to specific projects.

By building project-level tracking into the fabric of operations, companies can reduce compliance costs while strengthening their credit claims.

Risks of Noncompliance

The stakes for ignoring Section G are high. Claims that lack sufficient detail could be denied. More importantly, filing inadequate information could trigger prolonged examinations, tying up refunds and creating additional administrative burdens. With the IRS having flagged R&D credits as an area of heightened scrutiny, taxpayers cannot afford to treat Section G lightly.

For CPAs, this creates both a challenge and an opportunity. The challenge is to help clients establish robust methodologies now, before year-end. The opportunity is to position your firm as a proactive advisor, assisting clients not just in claiming credits but in building sustainable processes that maximize their benefits while minimizing audit risk.

The Bottom Line

The R&D credit remains one of the most valuable incentives in the tax code, particularly as Section 174 expensing once again makes innovation-driven investment more attractive. But taxpayers should not assume that prior practices will suffice going forward. Section G of Form 6765 raises the bar, requiring project-level detail and careful allocation of QREs.

Companies that take steps now to implement workable tracking systems will be well-positioned to claim stronger, more defensible credits in 2026 and beyond. For CPAs, the message is clear: this is not just about filling out a form; it’s about helping clients rethink how they capture, document, and support their innovation efforts.