The most complicated credit in the tax code, explained in plain English.

By Amanda R. Sanchez, JD, MBA | Principal, abip CPAs & Advisors

In October, Terri Brechter explained why year-end tax planning starts now, not in January. One of the changes for 2026 she flagged relates to the R&D tax credit. This is one of my favorite things to talk about, so let’s talk about what it means for businesses and why the conversation should not stop with one tax credit.

I lead abip’s Strategic Tax Advisory Services (STAS) team, where we help businesses identify, evaluate, and implement specialized tax incentives as part of a broader tax strategy. Before entering the tax world, I specialized in intellectual property law, contract law, anthropology, and industrial-organizational psychology. I bring a combination of legal, technical, and business perspectives to help clients navigate some of the more complicated provisions of the tax code. Just as importantly, our team works to make sure the tax positions we recommend are defensible, supported by the facts, and appropriate for each client’s circumstances.

Put simply: I spend a lot of time thinking about the tax code and how to connect all of the dots so that clients can focus on running their businesses.

When I sit down with a business owner, I rarely start by asking about taxes.

Instead, I ask them to tell me about their business: What are your people working on? I know you’re not just following a manual and putting together Lego blocks—how would I explain your technical work to a second grader? What are you working on now, and what do you want to work on in three to five years?

The answers tell me much more than a tax return ever could.

One of my favorite parts of the job involves helping business owners realize that there are incentives designed to help them invest in their businesses. I think of it as a treasure hunt. While someone tells me about their company in their own words, I enjoy mentally connecting what I hear to different provisions of the tax code.

Sometimes we uncover an immediate opportunity, like a tax credit that can lower their upcoming tax bill or reduce next quarter’s payroll taxes. Other times, we identify an opportunity worth planning for next year or even several years down the road. And sometimes, the most valuable thing I can do is ask the right questions, draw on my recent experiences in federal and state tax audits, and explain why a particular incentive may not be right for that client.

That is what strategic tax advisory is about: understanding a business and its story well enough to know which opportunities are worth pursuing, when to pursue them, and how each piece of the tax puzzle fits into the bigger picture.

“That’s not us”

The federal research tax credit is one of my favorite examples of this approach. When I bring up the R&D credit with a business owner, sometimes I hear: “Oh, that’s not us.”

Many business owners assume that the research tax credit only applies to certain industries, which is a common misconception. The research credit has existed in some form since 1981, and there has never been a rule stating that a taxpayer must work within a certain industry or file a tax return with a specific NAICS code. Instead, the research credit is available for taxpayers in the United States who engage in qualified research activities to discover technical information.

If I speak with a manufacturer, engineer, software developer, aerospace expert, agricultural client, an architecture firm that employs structural engineers, or any other kind of client whose business involves creating a new or improved product, process, software, or deliverable, I ask open-ended questions so that they tell me their story in their own words. I listen for the details that might seem ordinary to the people doing the work, and I am always interested in why: which technical challenges did the development team encounter, and why wouldn’t a simple Google search solve the problem? Which alternatives did the company consider, and why did certain options perform while others failed to function? Do technical personnel make notes or save drafts while they work, and why are certain details noted while others are not?

As a person tells me a story, I listen carefully and run through a mental map to identify which activities may satisfy the legal requirements for qualified research, catalog which departments and people performed that work, and note which expenses might be eligible for the credit.

However, identifying potentially qualified activities and pulling together a list of employees is only the beginning. Claiming the research tax credit means taking a position on a federal income tax return, and that position must be supported by reliable evidence. A business may be performing exactly the kind of work Congress intended to incentivize, but if we cannot adequately substantiate the activities and expenses, claiming the credit may not be appropriate or defensible.

That is where the conversation sometimes shifts from identifying an immediate tax benefit to building a better process for the future. We may work with the client to improve how they track projects, document technical activities, and account for related expenses, often in coordination with our Client Accounting Services or broader advisory teams. The end goal is not having the ability to drop numbers onto a tax form. Instead, I want the people behind the business to be in a position to identify, evaluate, and confidently support the research tax credit and other opportunities in the years ahead.

Courts have described the research tax credit as one of the most complicated credits in the tax code. I am thrilled when my team and I can work through those complexities so that our clients can focus on hiring and retaining talented people in their communities, solving technical problems, and growing their businesses.

What the R&D credit looks like in a real business

Say you run a 25-person machine shop in Houston. If a customer orders a part you have made 30 times before and you simply push a button to make it, that is probably not considered qualified research. However, if a customer hands you a sketch on a napkin and your team has to figure out the specifications, materials, and an appropriate manufacturing process, then it might be.

Technical people often do not realize how complex their everyday work is because, to them, it is just a Tuesday. I have had engineers tell me that the wildly complicated technology they developed and patented was born out of a side quest that they pursued on a slow day at the office.

Some examples of activities that business owners may overlook include:

• • Custom manufacturing and engineering, where a customer brings a technical problem and your team has to figure out how to solve it.
  • Designing new facilities or integrating complex machinery, where technical challenges require developing and testing solutions.
  • Developing data center infrastructure, including electrical systems, cooling, noise control, security, and software.
  • Developing software that connects with customers, vendors, or other outside parties. Software can be particularly complicated under the research credit rules, but it is worth talking about, especially if AI is involved.

The credit is driven primarily by qualified research expenses, so we always start building out a tax position by evaluating which wages were paid to employees performing, directly supervising, or directly supporting qualified research activities. Supplies can count, too. I have worked with companies that were able to claim six figures of scrap costs because of how those materials were used and how the development team maintained its contemporaneous data.

And sometimes, a conversation that begins with the research tax credit leads us to an entirely different opportunity. I have worked with companies that were able to recover a portion of their investments in manufacturing equipment or new fabrication facilities by utilizing a combination of various tax incentives and strategic planning opportunities. By working closely with Terri, our tax CPAs, and specialists across abip’s advisory practice, I can help clients evaluate how these opportunities interact, strengthen the tax positions we recommend, and develop a coordinated strategy that supports their broader business goals.

Why this is a better year to look

Two important developments make the end of the year an especially good time to revisit the research credit. One makes it easier for businesses to realize the tax benefits of their research investments. The other reflects more than a decade of IRS guidance, enforcement activity, and court decisions emphasizing the importance of documenting and substantiating qualified research.

The first development involves the tax treatment of research expenses. For several years, businesses had to spread their research costs out over time instead of deducting them right away. For many small and midsize companies, this made the overall economics of claiming the credit harder to justify because it could leave them with a significant increase in taxable income. Beginning in 2025, eligible domestic research and experimental expenses can generally be deducted in full again under § 174A. This makes the math much simpler and may make the research credit more attractive for small and midsize businesses. Some businesses also have opportunities to accelerate deductions for domestic research expenses they previously capitalized. Several of our clients ended up with six- or seven-figure deductions this year because our team knew what to flag on a tax return and how to navigate quite a bit of guidance following the One Big Beautiful Bill Act (OBBBA).

The second development reflects a longer evolution in how the IRS evaluates research credit claims. After years of litigation, examination guidance, and increased scrutiny of substantiation, the IRS has revised Form 6765, the form used to claim the credit. Beginning with tax years starting in 2026, many taxpayers will be required to provide more detailed information about the business components associated with their qualified research activities and expenses. Certain taxpayers qualify for exceptions to these additional reporting requirements.

The obligation to substantiate a tax position is not new. The courts have been emphasizing that a taxpayer must prove its eligibility for the research tax credit for years, and the revised form serves as a step in connecting the numbers reported on a tax return to a company’s technical research activities. My team has spent this year helping our research credit clients prepare for these reporting requirements so that we can be confident that the numbers on the tax form are the first point in a detailed and thoughtful story.

The myths I hear most

“It is free money.” It is not. Every number on the worksheet tells a detailed story, and that story has to be supported by the underlying facts and records.

“It is a simple Four-Part Test.” Nothing on a tax return lives in a vacuum. Pull one lever and you move several others, which is why I coordinate research credit decisions with the CPA preparing the client’s return.

“We would need perfect records.” You do not need perfect time tracking or elaborate project notes. You do need sufficient, reliable evidence to substantiate the activities and expenses being claimed, and those records should be maintained while the research happens rather than pieced together afterward. If your books and systems need work, our Client Accounting Services and Business Advisory Services teams can help you improve those processes for future years.

“We should go back and amend.” It depends. Amended refund claims are subject to specific filing deadlines and, for research credit refund claims, additional information requirements. I have seen refunds take more than a year. A pass-through entity with ten owners may also require coordination of amended returns at the owner level. Often, the better move is to evaluate the potential benefit and compliance costs before deciding whether to amend or focus on planning for the next year.

Why judgment matters

AI tools can be very good at gathering and organizing information, but they are not a substitute for validating that information, evaluating data quality, or exercising professional judgment. A polished AI-generated report can look official and still be wrong, and I have watched publicly available AI tools miss technical or legal nuances until the user pushes back or walks through the correct analytical framework. There are plenty of valuable applications for AI in the tax world—and even in the research tax credit world—but I consistently caution clients that AI-generated conclusions should not serve as the sole basis for determining whether a tax position is appropriate or defensible.

For example, two Tax Court memorandum opinions involving the research credit were released in 2026. I uploaded the opinions to a publicly available AI tool and stress tested a handful of scenarios. Experienced attorneys, CPAs, scientists, and technical consultants know when to ask follow-up questions, investigate potential exclusions, and consider downstream risks. In my testing, the AI tool failed to identify important issues in almost every scenario until I specifically directed it to consider them.

AI can play a valuable role in a tax incentives study, but taxpayers should understand how their service providers are using it, how the underlying information is being validated, and where experienced professionals are exercising independent judgment before a credit is reported on a tax return.

Our STAS team performs research tax credit studies for a fixed fee because we can review preliminary data, learn about a company, and reasonably estimate the work required to conduct the necessary due diligence and prepare defensible workpapers supporting the amounts reported on Form 6765. Although we always conduct a thorough review of each taxpayer’s business, we are not interested in trying to increase a credit amount or the number of years included in an engagement simply to increase our fee. The research tax credit can be incredibly valuable, but it is one tax credit and one position on a tax return. Our responsibility is to evaluate that position in the context of the taxpayer’s broader circumstances, not simply to maximize one number on one form.

Beyond R&D and research incentives

The research tax credit is just one incentive, but it serves as a useful starting point because it gives us an opportunity to understand the broader business. Once we understand how a company works, my team can lay out a menu of options. We are able to identify which levers to pull, why, and how each one may benefit the business in the short, medium, and long term. Other incentives worth asking about include:

• • Cost segregation, which can be particularly valuable now that 100% bonus depreciation has been restored for qualifying property. Instead of depreciating an entire commercial building over 39 years, we can now identify certain components that qualify for shorter recovery periods and accelerated deductions. This requires an engineering-based study and typically includes a site visit.
  • Retirement plan credits that may help eligible businesses offset the costs of establishing retirement plans and making contributions for their employees.
  • Investment tax credits and energy credits, some of which are changing and may require planning well before a project or expansion begins.
  • Workforce development incentives, including tax credits and other programs that may help businesses offset eligible hiring and training costs.

What to do in the next 30 days

1. List key projects from the past year where your team had to figure something out: a new product, a custom job, a process fix, or a technical challenge involving new equipment.
2. Note who worked on each one, and gather what you already have, such as drawings, redlines, saved versions, emails, and meeting notes. If it is easier to dump everything into a broad “RTC” folder, do that—if the information is easily accessible, we will work through it together when appropriate.
3. Pull together a list of your current employees, including each person’s job title, direct supervisor, department, and similar organizational chart information.
4. Think about upcoming investments, including new equipment, facilities, hiring goals, employee benefits, and other growth plans.
5. Schedule a conversation before year-end. Waiting may cost more than you think, and understanding your options now can help you make better decisions in the coming year. It will also help our team pull together comprehensive estimates to help you and your CPA with your spring tax season planning.

Let’s talk!

Luckily, you do not have to know the tax code in and out. Tell us what you do, what you are working on, and where you want to go. We can help you identify which opportunities are worth pursuing and help you prepare for them. Reach out today for a conversation!

Amanda R. Sanchez, JD, MBA | 713-350-2412 | asanchez@abipcpa.com