For many technology and life sciences companies, the records needed to support the 2026 Research and Development (R&D) tax credit are being created right now.
Engineering tickets are being closed, sprint epics are moving into production, scientists are advancing development programs and contractors are submitting invoices. Those everyday records can become the foundation of a defensible R&D tax credit claim, but only if companies preserve enough detail to connect the work and costs to specific research projects.
That preparation is more urgent for tax years beginning after 2026 because Section G of Form 6765 is now required for many taxpayers claiming the federal research credit.
Waiting until return preparation to reconstruct a year of research activity may leave tax teams trying to rebuild project histories from records that were never designed for tax reporting.
See our additional articles on R&D Tax Credits:
- Expansion of Eligibility & Increase in R&D Tax Credit Benefits for Startup / Small Businesses
- Top Things You Need to Know About the R&D Tax Credit
Section G changes what many companies need to report
Section G requires qualified research expenses, or QREs, to be reported by business component. A business component can be a product, process, computer software, technique, formula, or invention developed for sale, lease, license, or use in the taxpayer’s trade or business.
For taxpayers required to complete Section G, the IRS generally requires reporting business components in descending order of QREs until the company has reported at least 80% of total QREs, subject to a maximum of 50 components. Remaining components can generally be reported in aggregate.
The form also separates wage QREs into employees conducting qualified research, employees directly supervising that research, and employees directly supporting it. Supplies and contract research expenses must also be associated with the applicable business components.
This does not mean the IRS requires a particular project-management or time-tracking system. It does mean that a company’s records need to support the allocations ultimately reported on Form 6765.
Your operating systems can become your R&D documentation system
For technology companies using agile development, project-management data can be extremely useful. Consider tagging Jira tickets, sprint epics, GitHub projects, or internal project codes to the product or software component being developed. Employee time records should provide enough detail to distinguish work on qualifying development projects from general administration, maintenance, customer support, or other activities.
For life sciences companies, the same concept can be applied to research candidates, formulations, devices, development programs, or other identifiable components. Lab records, study documentation, payroll data, and vendor expenses should tell a consistent story about where research resources were used.
The goal is not to create paperwork for paperwork’s sake. It is to preserve the evidence already generated in the normal course of development and organize it while the people performing the work still know what happened.
Do not overlook contractors and supplies
Payroll often receives the most attention in an R&D credit study, but Section G also requires component-level reporting of other QRE categories.
Companies should begin coding qualifying contractor invoices and research supplies to the projects they support. If an invoice covers several projects, establish a reasonable allocation method while the underlying work is still identifiable.
A year-end general ledger containing a single “R&D contractors” account may tell you how much was spent. It may not tell you which business components generated those costs.
Some taxpayers are exempt from Section G
Not every R&D credit claimant will have to complete Section G. Under the current Form 6765 instructions, an exception applies to qualified small businesses electing the payroll tax credit. Another exception generally applies when controlled-group QREs do not exceed $1.5 million, average annual gross receipts for the prior three tax years do not exceed $50 million, and the research credit is being reported on an original return.
The controlled-group rules deserve attention for founders operating multiple related entities. Eligibility is not necessarily determined one company at a time.
Qualified small businesses may also be able to elect up to $500,000 of research credit against payroll taxes. That election has its own qualification rules, including gross receipts of less than $5 million for the credit year and no gross receipts before the applicable five-tax-year period.
What companies should do now
Companies expecting to claim a 2026 R&D credit should use the remaining months of the year to test whether their current records can support the return they will eventually file.
Review whether employees track work by project, whether project names can be mapped to business components, whether contractor and supply costs can be traced to those components, and whether engineering or scientific records preserve the technical work performed.
Also identify potential Section G exceptions now. A company approaching the $1.5 million QRE threshold after a financing round or period of rapid hiring may need more granular reporting than it did in prior years.
How Aura Advisors can help with R&D tax credit documentation
The strongest time to improve R&D documentation is while the research is happening. Companies should evaluate whether their payroll, project-management, accounting, and vendor records can identify qualifying costs by business component before 2026 closes. Where gaps exist, relatively modest changes to project codes, time-tracking practices, invoice coding, and documentation procedures can make year-end analysis significantly more reliable.
Aura Advisors can help companies assess Section G applicability, map existing operational data to Form 6765 requirements, identify documentation gaps, and build a practical process that works with the systems engineering, product, finance, and scientific teams already use. The objective is a credit calculation supported by records created close to the underlying work, rather than a reconstruction performed months later.
For More Reading:
- IRS Update on Revised Form 6765
- The Interplay Between IRC Sections 174 and 41
- Section 174 Capitalization Relief Is Here: How the OBBA Affects R&E Tax Strategy
Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.