Navigating R&D Tax Credit Changes

The federal government incentives research and development spend via the credit for increasing research activities, better known as the R&D tax credit, promulgated under IRC Section 41.  In 2025, the U.S. Congress and the IRS made subtle changes to the R&D tax credit that affect tax returns for 2025 and beyond. Here’s how these changes impact tax compliance and the calculation of this valuable credit.

The Section 280C Election: What’s New Is Old

The IRS allows taxpayers to elect a Section 280C adjustment to reduce their gross R&D credit by 21% (the corporate tax rate). Otherwise, taxpayers must increase their federal income tax (FTI) by the amount of the gross R&D credit.

After certain provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) took effect in 2022 and before the passage of the One Big Beautiful Bill Act of 2025 (OBBBA), most taxpayers preferred claiming the gross credit because it yielded a greater tax credit, and in most cases, it did not require an add-back to FTI. However, a recent change to the instructions for IRS Form 6575, Credit for Increasing Research Activities, has taxpayers revisiting this decision for tax years 2025 and beyond.

Here’s how the methods work under current rules: The gross method provides a larger tax credit but requires the taxpayer to add the credit amount to their FTI. The Section 280C method provides a smaller tax credit (21% less than the gross amount), but there’s no add-back to FTI.

In the years immediately preceding the OBBBA’s enactment, instructions provided that the gross method didn’t always require an add-back to FTI. Rather, the add-back applied only when the gross credit exceeded the deduction allowed for qualified research expenses (QREs).

R&D Tax Credit: Gross Credit or Section 280C Election?

Now that add-backs are clearly required whenever the gross credit is claimed, the reduced credit will generally be the more beneficial option. Although R&D tax credits may be lower than in recent years, there are silver linings. For example, taking reduced credit could result in lower state income tax liabilities than taking the gross credit. That’s because the reduced credit results in a lower federal taxable income, which is the basis for most state income tax computations.

There are still cases in which the gross credit is more advantageous. That’s why it’s critical to discuss the options with an experienced R&D tax advisor.

Smith + Howard: Your Partner in R&D Tax Credit Optimization

Smith + Howard’s Specialty Tax Services team takes a holistic approach to helping you maximize your R&D tax credit. Our advisors stay up to date on legal and regulatory changes and work closely with you to evaluate credit options, ensure compliance, and identify opportunities for tax savings. Whether you need guidance on the Section 280C election or a comprehensive review of your R&D activities, we deliver tailored solutions to help your business claim every dollar it deserves. 

To learn more about how the Specialty Tax Services team can serve you, reach out to Jackson Moore.