What's the latest on the research and development (R&D) tax front? From the potential repeal of Section 174 capitalization to the transformative impact of AI on R&D processes, there are key considerations business leaders should factor in to maximize tax savings.

I recently had the pleasure of speaking with Deb Pallasch, KLR’s R&D Practice Leader, to discuss the latest developments in R&D tax incentives and the opportunities on the horizon for 2025. Her unique expertise offers a window into how organizations can navigate potential changes and maximize the value of their R&D efforts. Let’s dive in.

Q: What should business leaders keep in mind about recent and potential changes in R&D tax policies, especially under President-elect Trump’s administration?

Deb: The most anticipated change is the repeal of Section 174 capitalization. Now that the Senate and House are controlled by the same party, the prevailing opinion is that capitalization will be repealed at some point, allowing businesses to go back to fully expensing R&D costs in the year they’re incurred.

In my experience, I have found that many companies have either stopped or slowed down their R&D spending in recent years. With this likely repeal, we anticipate a shift back to innovation as businesses reinvest cash into these efforts.

I am advising clients to:

1. Identify targeted innovation areas.
2. Understand what qualifies for the credit.
3. Ensure proper training and tracking of qualifying costs.

By doing this, companies will be prepared to ramp up if the repeal happens and can capture their costs accurately.

Q: What are the risks for companies that don’t update their R&D tax processes as policies evolve?

Deb: One of the biggest risks is failing to keep up with recent changes in the legal landscape. Over the last three years, there have been significant case law developments that provide clearer guidance on what qualifies for the credit.

Companies that don’t stay informed may miss opportunities or make mistakes in their claims. We’ve seen many rulings recently, such as Meyer Borgman Johnson which raised the bar for what is required for a payment to be considered contingent on the success of research. In Little Sandy Coal, the courts opined that a taxpayer must demonstrate that at least 80% of its research activities on a business component level constitute elements of a “process of experimentation” to claim the credit.

We can help with this, but staying aware of the changes is key as companies ramp up their innovation efforts.

Q: What’s the most common mistake companies make when claiming the R&D tax credit?

Deb: The biggest mistake is failing to identify what qualifies. Tax codes are notoriously complex and not user-friendly, making it easy to underestimate what’s eligible. This often leads to businesses leaving significant tax savings on the table.

The R&D credit is a dollar-for-dollar tax credit, not just a deduction, so it can have a substantial impact on a company’s tax liability. Even startups with no tax liability can benefit through the payroll credit.

Many companies don’t prioritize the R&D credit or fail to recognize the full scope of qualifying activities. Don’t overlook this valuable credit—you don’t want to miss out on valuable savings!

Q: Can businesses in any industry qualify for the R&D tax credit?

Deb: Absolutely. All industries are eligible and should explore this credit. A common misconception is, “We don’t invent anything, so this doesn’t apply to us.” That’s not the case. The legislation was purposely written to not only focus on inventions but improved designs, developments and processes. Moreover, the development doesn’t need to be new to the industry, just new to your company. If you improve a tool, integrate robotics, or refine a process, you may qualify.

I often remind clients: just because no one in your business wears a lab coat doesn’t mean you don’t qualify for the credit. It was created to encourage and support innovation across all sectors.

Q: How has AI technology changed the way businesses approach R&D taxes?

Deb: Overall, AI has become a powerful tool, shrinking timelines and boosting innovation for companies pursuing R&D.

If your company is developing AI or AI-based solutions, those activities likely qualify for the R&D tax credit. Beyond that, AI has revolutionized R&D by enabling businesses to process large amounts of data quickly. Tasks that used to take months can now be completed in days.

With this increased efficiency, companies can bring new products or processes to market much faster, assess their R&D activities more efficiently and identify qualifying expenses more quickly.

Do you need help assessing your tax situation? Let us help you maximize savings through the R&D Tax Credit.

Schedule a call with Deb here.