R&E Tax Credit Rules for 2026
The federal Research & Experimental (R&E) Tax Credit continues to reward businesses that invest in innovation. Whether you’re developing new products, improving manufacturing processes, or creating software, qualifying research activities may generate valuable tax savings in 2026.
Here’s what businesses need to know.
What Is the R&E Tax Credit?
The R&E Tax Credit, under IRC Section 41, rewards businesses that increase qualified research activities.
Businesses can generally claim either:
- The Regular Research Credit, or
- The Alternative Simplified Credit (ASC)
The credit is part of the General Business Credit and can significantly reduce federal income tax.
Who May Qualify?
Your research activities may qualify if they:
- Seek to develop or improve a product, process, software, formula, or technique.
- Rely on engineering, physical science, biological science, or computer science.
- Address technical uncertainty.
- Use a process of experimentation to evaluate potential solutions.
Qualified projects often include product development, manufacturing improvements, software development, automation, and engineering design.
2026 Changes to the Qualification Rules
Beginning with tax years after December 31, 2024, qualified research must now be tied to domestic research and experimental expenditures under IRC Section 174A.
This means:
- Domestic research generally continues to qualify.
- Foreign research activities generally do not qualify for the credit.
- Businesses should carefully track where research is performed.
Common Qualified Research Expenses
Qualified Research Expenses (QREs) may include:
- Employee wages for qualified research activities
- Direct supervision of research
- Supplies consumed during research
- Qualified contract research expenses
- Certain computer rental or cloud computing costs used for research
Proper documentation is essential to support these expenses.
Activities That Do Not Qualify
Not every project is eligible.
Common exclusions include:
- Research performed outside the United States
- Routine quality control testing
- Market research or customer surveys
- Research after commercial production begins
- Duplicating existing products
- Research funded by another party
Special Rules for Internal Software
Software developed primarily for internal business use may still qualify, but only if it meets additional IRS requirements demonstrating:
- Innovation
- Significant economic risk
- A lack of commercially available alternatives
These rules are stricter than those for customer-facing software.
Payroll Tax Credit for Startups
Qualified Small Businesses may be able to apply up to $500,000 of the research credit against the employer portion of Social Security tax.
Generally, the business must:
- Have less than $5 million in current-year gross receipts.
- Have no gross receipts before the five-year testing period.
This provision allows eligible startups to benefit from the credit even before becoming profitable.
New Form 6765 Reporting Requirements
For most 2026 tax returns, Form 6765 requires expanded reporting.
Businesses may need to provide:
- Business-component level reporting
- Detailed Qualified Research Expense information
- Additional documentation supporting research activities
Maintaining organized records throughout the year is more important than ever.
Best Practices for Claiming the Credit
- Document research projects as they occur.
- Track employee time spent on qualified activities.
- Separate domestic and foreign research costs.
- Maintain detailed payroll, supply, and contractor records.
- Review Form 6765 reporting requirements before filing.
Final Thoughts
The R&E Tax Credit remains one of the most valuable federal incentives available to innovative businesses in 2026. While the core qualification rules remain familiar, new Section 174A requirements and expanded Form 6765 reporting make proper documentation more important than ever.
Businesses investing in product development, engineering, software, manufacturing improvements, or technical innovation should review their activities carefully to avoid leaving valuable tax credits unclaimed.
Need Help Maximizing Your R&E Tax Credit?
Our CPA team helps businesses identify qualifying research activities, calculate available credits, prepare Form 6765, and maintain the documentation needed to support IRS compliance.
Contact us today to schedule a consultation and discover how the 2026 R&E Tax Credit could reduce your business’s tax liability.
Innovation drives growth—and smart tax planning helps you keep more of the rewards.
