As we approach the end of 2026, we are starting to turn our eye towards the 2026 R&D credit projects starting in early 2027. For companies and business owners planning to claim federal Research and Experimentation Tax Credits (R&E Credits, or often called R&D Credits), now is a great time to start planning for year end and mapping out what will be needed to comply with two big changes for the credit:
- Heightened IRS scrutiny in the wake of the recent judicial opinion in George v. Commissioner
- The IRS’s implementation of mandatory Section G on Form 6765 for taxpayers that do not meet either of the exception criteria
While the focus of R&D credit work has historically focused on identifying projects (“business components,” per the IRS), tallying up the Qualified Research Expenses (QREs), and calculating the credit, conversations for tax year 2026 and beyond will also need to include substantiation and documentation.
The overall message from the IRS and the courts can be summarized as follows: claiming the credit is not enough if you don’t have the documentation to show exactly how and why the activities qualify.
Counting Chickens Before They Hatch in George v. Commissioner
The Tax Court’s decision in George v. Commissioner (T.C. Memo 2026-10) brings some good news, some bad news, some guidance, and a whole lot of chicken puns. The case involved George’s of Missouri, Inc. (GOMI), a massive, fully integrated poultry processing enterprise that claimed millions in research credits across multiple tax years via amended returns in the early 2010s.
The IRS completely disallowed the credits, arguing that the activities were “routine farming operations” rather than R&D since the testing largely occurred within the commercial production environment. The Tax Court rejected the position that commercial operations preclude QREs and explicitly ruled that agricultural and biological experimentation qualify for the credit.
The Good News: A Few Wins Were Directly Handed to the Taxpayers.
- Production scale testing can be included: innovation does not require a laboratory setting and can legally occur in barns, fields, or factories. This is also a good reminder that manufacturing trials, software development, food production, and heavy industry all have R&D outside the classic “lab coat at a bench” setting.
- Feed inputs are includable as supplies: building on prior court cases, the Tax Court validated that the feed and other costs for the flocks are includable as Pilot Model costs since the company can’t test the variables under review without them.
- Supply claims are independent of wages: The court specifically clarified that wage QREs were not required to successfully claim supply expenses related to an experiment or trial.
The Bad News: Documentation Still Decides the Outcome
When the operational records needed to substantiate the employee interviews conducted months or years after the development didn’t support the amounts claimed, the company lost out on substantial R&D credits. Items such as feed records and logs did not support the development projects included, and 3 of the 7 research trials were fully excluded.
This continues the court’s emphasis on substantiation and is consistent with the treatment in Little Sandy Coal Company v. Commissioner, where data and project level support were required to sustain a credit claim. Contemporaneous records are critical for supporting project narratives and the Four-Part Test used to determine whether an activity counts as qualified research.
Base period calculations were also penalized or reduced as estimates were deemed to be used too broadly and applied aggressively. Retroactive analysis and reconstructed records can only take a company so far. The courts continue to permit only reasonable approximations rather than speculation and assumptions.
The Guidance: Outlines and “What to Do”
The tax court clearly indicated that if a base year cannot be computed, even if expenses are known, the taxpayer is to use the Alternative Simplified Credit and 6% of current year expenses credit rate to calculate the current period credit.
The court case document itself provides some excellent examples of project narratives to walk through the Four-Part Test for the various business components a taxpayer will include.
Section G Goes Live (And This Time We Mean It!)
While the IRS has delayed mandatory project level disclosure two years in a row, as of the publishing date of this article, Section G is no longer optional for all taxpayers.
We explored in detail the new requirements last year before the IRS deferred for another year here: IRS Finalizes Federal Form 6765 for Clients Claiming the R&D Tax Credit
As a reminder, companies must allocate expenses by specific business components, identifying and reporting the top 80% of QREs (with an aggregate “everything else” category) or the largest 50 by QRE total (again, with the final aggregate category).
Details, Details, Details
The timing of Section G is consistent with the recent court cases and IRS publications shifting the documentation of projects from audit to the tax filing; notably, QREs are also being split out not just by business component but by type:
- Details of the business component are required including name, a brief description, and other information.
- Wages are now split into Direct Contribution, Direct Supervision, and Direct Support, enabling 80% analysis under Little Sandy Coal. Qualified Employees who fulfil multiple roles should have their time allocated into the appropriate categories, for example a supervisor who also performs qualified research.
- Supplies are also allocated against business components.
- Computer rental expenses are also to be tracked against the different business components.
- Contract Research Costs (reduced to 65% or 75% of spend, as appropriate) are also required to be allocated.
Section G Can Still Be Skipped in Limited Cases
The IRS understood that the administrative burden to comply is non-trivial and built in a provision for skipping the reporting on live returns for some companies electing the Payroll Tax Offset under section 41(h) and smaller businesses with low QREs. Companies can skip providing the details during the timely filing (including extensions) of credits as long as they meet one of the two criteria listed below:
- The company is electing the Payroll Tax Offset under section 41(h) AND is taking the reduced credit under 280C – note that many companies taking 41(h) will forgo the reduced credit to increase 41(h) so analysis is needed for the un-reduced credit and effort/cost of compliance with Section G.
- Smaller companies with under $50M average receipts in the prior 3 year AND QREs under $1.5M – this correlates to credits under about $150k.
Note that amended returns are not eligible for exemptions, and taxpayers are required to complete Section G on any retroactive claims.
What Taxpayers Can Do To Make Compliance More Efficient
Throughout the year, several key things can be done to align documentation with the requirements:
Keep a List of Business Components
This doesn’t need to be perfect, but having a list of projects to review to make sure each meets the Four-Part Test before including the expenses can make year-end data collection much easier. Check in with both the direct R&D teams, but also include Operations Managers, Quality, Testing, and other departments to make sure projects are not missed.
Keep Track of Your Technical Documentation
Project plans, design documents, meeting notes, even snapshots of whiteboards and prototypes can be a big help. Toss those into folders with good names and dates throughout the year to simplify this process. Often, this is also as simple as “don’t throw that away before scanning” and “don’t delete iterations.”
Time Tracking
Time tracking is incredibly helpful, especially if projects are aligned with the IRS business component definitions. When time tracking is not available, collecting time allocations as close to the end of the period as possible will help support the claims.
Supplies, Computer Rental, and Contract Services
If the company has significant expenses in the other categories (supplies, computer rental, and contract services), make sure documentation exists that can tie the costs to specific business components. Often, using a project code or the memo line to make a findable field with this information is adequate.
At the end of the year, companies can also do a few things to make the process easier:
- Review business components to see which ones are eligible for inclusion in the R&D credit.
- Collect employee time allocations as close to EOY as reasonable – it is much easier for an engineer or scientist to remember what they did last year when asked in January than in June.
- Look over expense accounts and see if any major costs need tied back to specific projects.
Documentation will Carry the Day
Overall, the result of George v. Commissioner and the implementation of Section G on the 6765 should not come as much of a surprise given the warnings the IRS and courts have been giving taxpayers and the industry for the last few years. A little extra care up front will make completing the additional disclosure on Section G a whole lot easier!
Contact Sensiba’s R&D Tax Credit team to discuss 2026 documentation and Form 6765 filing readiness.
