Maximize Your R&D Tax Credit: Adapting to New Section 174 Requirements with Better Time Tracking

This article is brought to you by our partners at Trove Consultants and Kess & Chitty Law LLC.

Maximize Your R&D Tax Credit

The Tax Cuts and Jobs Act of 2017 (TCJA) introduced a major change to Section 174: the elimination of immediate expensing for research and development (R&D) expenditures. Starting with tax years beginning after December 31, 2021, businesses are now required to amortize R&D costs over five years for domestic activities and 15 years for foreign activities.

Many taxpayers underestimated the impact of this change, leading to larger-than-expected tax liabilities. This modification has also increased the bookkeeping and record-keeping workload for businesses.

For those with eligible Section 174 costs, one of the few ways to offset the increased tax burden is to leverage the R&D Tax Credit. However, like Section 174, the R&D Tax Credit has also evolved, requiring more detailed substantiation. Adapting to these changes is essential for businesses, particularly in research-intensive industries like IT, manufacturing, biotech, and software. Time tracking has emerged as a crucial tool for compliance and tax credit optimization.

How the R&D Tax Credit Substation Rules Aid in the Section 174 Changes

Previously, businesses could immediately deduct R&D expenses, providing a simple and direct benefit. Now, detailed documentation and precise tracking of R&D activities are more critical than ever for properly allocating expenses to Section 174 and securing the R&D Tax Credit.

“The new amortization rules require businesses to have a much more detailed understanding of their R&D costs,” explains Lacey J.S. Robb, a tax lawyer with Kess & Chitty Law who has conducted R&D Tax Credit studies for over 20 years. “Without contemporaneous documentation, companies risk leaving significant savings on the table.”

The Push to Restore Immediate Expensing

The shift to amortization has faced widespread criticism from business leaders, who argue it discourages innovation. Since 2022, multiple congressional efforts to reinstate immediate expensing for R&D costs have failed due to political gridlock and competing priorities.

While lawmakers may revisit Section 174 as part of negotiations on expiring TCJA provisions, no changes have been enacted yet. Until any legislative updates occur, businesses must comply with current amortization rules and maintain strong record-keeping practices to mitigate risks.

The Importance of Time Tracking

One of the most significant challenges under the new rules is accurately identifying and substantiating R&D activities. Time tracking has become an essential tool for capturing labor costs, which are often the largest component of R&D expenditures.

“Our clients who systematically track their time and resources achieve higher R&D Tax Credits and are better prepared to support their claims,” says Adam Kess, President of Trove Consultants, which specializes in securing tax credits for SMBs. “Clear records also help businesses understand their return on R&D investments and streamline the filing process.”

Additionally, businesses must prepare for potential updates to IRS Form 6765, used to claim the R&D Tax Credit. Draft revisions suggest more granular documentation requirements, including detailed time records and resource descriptions for R&D activities.

“The draft version of Form 6765 signals increased scrutiny for R&D claims,” Robb adds. “Time tracking provides the evidence businesses need to stay compliant and avoid disallowances.”

Why Now Is the Time to Act

While the future of Section 174 remains uncertain, the R&D Tax Credit is a permanent benefit. Implementing or improving time-tracking practices will enhance your ability to claim the credit by ensuring accurate and efficient record-keeping of R&D activities.

With the right tools and expert guidance, businesses can meet compliance requirements, reduce risk, and continue driving innovation while maximizing their tax benefits. 

As always, consult your accounting specialist for tax information related to your organization.

About the Authors

Lacey J.S. Robb
Lacey Robb, co-author of this blog, brings over 20 years of expertise in legal and tax matters, with a specialization in Research & Development Tax Credits. Her experience at leading law firms and Big 4 firms enables her to provide a comprehensive and strategic approach to maximizing R&D credits. Lacey is a licensed attorney with a Juris Doctor, a Master’s in Taxation, and a BA in Psychology.

Adam Kess
Adam Kess, co-author of this blog and President of Trove Consultants, is passionate about helping businesses uncover savings through tax credits and incentives. With 15 years of experience in finance, strategy, and M&A, Adam combines his entrepreneurial spirit with his corporate expertise to guide businesses toward financial success. He holds an MBA and a diverse background in international business and finance