If your business claims the R&D tax credit, the way you report it is changing. Starting with tax years beginning in 2026, most taxpayers will have to complete Section G of Form 6765, a new section that requires detailed information about the business components that support the credit. For 2025 original returns, it’s optional. For 2026 returns, unless you fit one of two exceptions, it’s required.
The credit itself isn’t changing. What’s changing is how much the IRS wants to see. If your records can’t tie time and expenses to specific projects, then now is the time to fix it!
What Section G is
Section G is the “Business Component” Information section of Form 6765, the form used to claim the credit under IRC §41. A business component is a product, process, formula, invention, software, or technique that the taxpayer is trying to develop or improve.
Most businesses track their R&D by project, but a project and a business component aren’t always the same thing. A single project can involve several business components, and several related projects can support one business component. Because Form 6765 reports at the business component level, you need to understand how the projects you track internally translate into the business components you report.
Until now, most companies reported their R&D credit as a few totals: wages, supplies, and contract research. Section G requires you to break those totals down by business component. In plain terms, the IRS is moving from “here’s our total” to “here are the business components that make up our claim, and here’s how the costs were allocated.” That gives examiners a much clearer view of how each claim was built.
Who has to complete it
| Tax year | Section G status |
|---|---|
| Tax years beginning in 2025 | Optional for all taxpayers (unless amending 2025 returns) |
| Tax years beginning in 2026 and later | Required, unless an exception applies |
You are not required to complete Section G if either of these applies:
- You’re a qualified small business (QSB) electing the payroll tax credit under IRC §41(h).
- You have $1.5 million or less in qualified research expenses (QREs) and $50 million or less in average annual gross receipts over the prior three tax years. This exception applies to original returns, timely or extended, not amended returns. QREs are measured across your entire controlled group, not just one entity.
Everyone else claiming the credit for a 2026 tax year should plan on completing it.
What you’ll need to report
Section G asks for detailed information on the business components that make up most of your R&D credit claim. In practice, that means reporting enough business components, starting with the largest, to cover at least 80% of your total QREs, up to a maximum of 50. The rest are reported together on a single aggregate line.
For each of those components, expect to:
- Identify the business component. Name it and describe what kind of component it is (product, process, software, and so on). Software projects need additional classification, such as whether the software is for internal use.
- Allocate costs to each business component. Qualified wages, supplies, contract research, and computer rental or lease costs, tied to each specific business component.
- Separate wages into three groups. Wages for individuals who performed the research, individuals who directly supervised the research, and individuals who directly supported the research.
While Section G is organized around business components, many companies track research activities, costs, and employee time at a higher level, such as by department, cost center, or project. That means you may need to work out how your internal records translate into business components, which components have to be reported separately, and how to allocate QREs among them.
The wage breakdown is where many companies and CPA’s will get stuck. Even after identifying the business components that drive most of their R&D spending, many businesses don’t track employee time at the project or business component level. Payroll systems generally track employees by department or cost center, and few businesses record whether an employee was performing, directly supervising, or directly supporting the research. Pulling the wage information together for Section G can take more work than most companies expect.
An example of where the problem will identify itself:
Hypothetical example. A mid-size manufacturer claims the credit based on about $2.4 million in QREs across eight product improvement projects. In past years, its CPA calculated the credit from departmental payroll and a year-end interview with the engineering lead.
Under Section G, that same company needs to determine which business components represent the majority of its R&D spending, allocate costs to those business components, and show how each engineer’s wages split among performing, supervising, and supporting the work. If the only records are departmental totals and memory, that is very hard to rebuild after year-end.
The credit may be just as valid as before. The documentation simply isn’t organized the way the IRS now wants to see it.
Common misconceptions we see
- “It’s optional, so we’ll deal with it later.” It’s optional for 2025 original returns only. Records for tax years beginning in 2026 are being created right now. If project tracking isn’t in place during the year, you will have to reconstruct it.
- “Our CPA will handle it at filing time.” Your CPA can prepare the form, but they can’t create project-level documentation after the fact. This information is often easiest to gather when activities, costs, and responsibilities are documented throughout the year.
- “We’re small, so we’re exempt.” The small-taxpayer exception requires both $1.5 million or less in QREs and $50 million or less in average annual gross receipts. Plenty of growing companies have modest revenue but QREs above the threshold, or the reverse.
- “More reporting means more audit risk, so we should stop claiming.” Section G makes weak documentation more visible. It doesn’t make a well-documented claim any less valid. The focus should be on keeping the documentation that supports the credit.
What to do now
- List your projects and identify the business components behind each one. Focus on work from this year that involved technical uncertainty and experimentation.
- Check whether your systems can track time and costs by project, and whether those records can support business component-level reporting. If timesheets or project management tools already capture this, confirm they can also show the perform, supervise, or support split.
- Tie supplies and contractor costs to projects as they happen. Coding invoices to a project number during the year is far easier than sorting them later.
- Find the gaps. Note where your records are thin, such as a key engineer with no project-level time or a contractor invoice with no project reference.
- Talk with your CPA early. Decide together whether to complete Section G voluntarily for 2025 as a dry run.
Questions to ask your accounting team and ETS:
- Do we meet either Section G exception for our 2026 tax year?
- Should we complete Section G voluntarily on our 2025 return to test our process?
- Which business components likely make up 80% of our QREs?
- Can our current payroll and project systems support the wage breakdown Section G requires?
- If we amend a prior-year return to claim the credit, what extra information will we need?
Frequently asked questions
When is Form 6765 Section G required? For tax years beginning in 2026 and later. For tax years beginning in 2025, it’s optional on original returns. If you amend a 2025 return to claim the credit, part of Section G is still required.
Who is exempt from Section G? Qualified small businesses electing the payroll tax credit, and taxpayers with $1.5 million or less in QREs and $50 million or less in average annual gross receipts over the prior three tax years, filing an original return.
What is a business component for the R&D credit? A product, process, formula, invention, software, or technique that the research was meant to develop or improve.
Do I have to report every business component? No. Section G generally requires detail on the business components that make up the majority of your QREs: enough to cover at least 80%, up to 50 components. The rest are grouped together on a single aggregate line.
Does Section G change whether my work qualifies? No. The four-part test under IRC §41(d) still decides what qualifies. Section G changes how much detail you report.
Get your records ready while there’s still time
Section G is easier to complete for companies that track research activities and costs as they happen. Getting ahead of it now can head off problems at filing time. If you’re not sure whether your current documentation, project tracking, and cost allocation will support the required reporting, ETS can help. Our engineering and tax professionals work with businesses and their CPAs to evaluate readiness, spot gaps, and put practical fixes in place.
This article is general information, not tax or legal advice. Tax rules change, and how they apply depends on your specific facts. Talk with your CPA or tax advisor before acting on anything here.
Sources: IRS: Form 6765 and instructions · IRS: revised draft Form 6765 announcement · Grant Thornton: Form 6765 reporting requirements
