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Grants and incentives

R&D tax credit and Section 174A: what changed for US manufacturers

Federal research-expense treatment changed for domestic costs in tax years beginning after December 31, 2024. The Section 41 credit remains a separate, fact-specific calculation with its own eligibility, documentation, and Section 280C coordination rules.

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October 23, 2026 · By Asgard USA · Grants and incentives

Domestic research-expense treatment changed again

For tax years beginning after December 31, 2024, Section 174A generally allows a current deduction for domestic research or experimental expenditures. Taxpayers may instead elect a domestic capitalization and amortization approach. Foreign research and experimental expenditures remain subject to a 15-year amortization rule.

This follows the earlier federal requirement to capitalize research expenses for tax years beginning after December 31, 2021. The applicable treatment depends on the taxpayer, the expenditures, the tax year, and the current IRS procedures. A business should keep the statutory rule and its own tax position separate from a broad description of research activity.

The Section 41 credit is a separate analysis

The Credit for Increasing Research Activities is calculated from qualified research expenses under Section 41. Depending on the method, the calculation can involve qualified wages, supplies, a permitted portion of contract research, a fixed-base amount, or the alternative simplified credit calculation. The IRS applies the qualification analysis business component by business component.

The alternative simplified credit is generally 14 percent of current-year qualified research expenses over 50 percent of the average qualified research expenses for the prior three years. That formula is only one part of the analysis. The claimed work, records, exclusions, entities, costs, and filing approach all matter.

Section 280C keeps the deduction and credit connected

A current deduction and a research credit should not be described as two unrestricted benefits on the same costs. Section 280C can require a reduction in the Section 174A deduction or capitalized amount unless a taxpayer makes the relevant reduced-credit election. The choice belongs in the tax analysis, not in a generic financing claim.

The transition rules also have specific timing. Revenue Procedure 2025-28 describes options for certain remaining unamortized domestic amounts from 2022 through 2024 and set a July 6, 2026 deadline for the special eligible-taxpayer retroactive election. That deadline should not be presented as a current open opportunity.

Keep records organized before the return is prepared

The IRS instructions for Form 6765 identify the current research-credit framework and the business-component detail expected for many claims. A practical file connects the project, technical uncertainty, process of experimentation, qualified costs, people, time periods, and supporting records. Commercial-production research, adaptation or duplication, funded research, and some internal-use software can have separate treatment or exclusions.

A qualified small business may be able to elect part of the credit against employer payroll-tax liability, subject to the statutory eligibility test, the $500,000 cap, timely original-return filing, and Form 8974 mechanics. Prior-year credit claims can also have amended-return and substantiation requirements. A qualified U.S. tax professional should determine the applicable filing position.

Use a research record that can survive a later question

Research-credit documentation is stronger when it is developed from the operating record rather than reconstructed solely from a tax-return workpaper. Project plans, technical specifications, test results, engineering records, time records, supply detail, invoices, meeting materials, and accounting records can help a tax professional connect a claimed cost to the relevant business component and activity.

The documentation does not need to turn an operating company into a tax department. It does need to preserve the factual trail: what problem the business was trying to solve, what alternatives or experiments were considered, which people performed the work, what costs were incurred, and what business component the work supported. The applicable tax rules determine which facts ultimately qualify.

A financing discussion should not convert a possible credit or deduction into an operating assumption without the tax analysis. The most accurate capital plan states whether the item is only being evaluated, has been calculated by a tax professional, has been claimed, or has produced a completed tax result. That distinction helps prevent a future tax position from being described as current operating cash.

Before year end, the business can also identify the people who hold the relevant operating records and the tax adviser who will assess the return position. This reduces the risk that technical records, payroll detail, supply data, and accounting support are assembled only after the relevant personnel or documents are difficult to locate. It does not change the need for a fact-specific tax analysis.

What this means for your capital stack

Tax treatment belongs in the capital picture, not a loan projection by assumption.

A research-credit or deduction question can be material to a business plan, but it requires tax analysis and current records. Do not assume a tax benefit changes financing availability, pricing, or approval before the relevant tax and lender review is complete.

Common questions

Clarify the decision before the next conversation.

Does every manufacturer with engineering work qualify for the research credit?

No. Qualification is fact specific and applies the Section 41 rules to each business component, costs, records, and current tax guidance. A tax professional should assess the actual activity and documentation.

Can a business claim the credit for a prior year?

A prior-year claim may be possible through an amended return when the tax year remains open and the taxpayer can meet current substantiation requirements. The applicable limitation period and filing facts should be reviewed with a tax professional.

Can a research credit reduce payroll taxes?

A qualified small business may elect part of its research credit against employer payroll-tax liability when it meets the applicable eligibility, cap, and filing rules. The IRS source below explains the current process.

Sources

Current source material for this topic.

Revenue Procedure 2025-28

IRS procedure covering Section 174A transition options, the special election deadline, and Section 280C coordination.

Instructions for Form 6765

IRS instructions for the research credit, qualified research expenses, the alternative simplified credit, exclusions, and payroll-credit election context.

Funding, engineered

Bring the facts of the business into the funding conversation.

The relevant program, lender, transaction, and documentation requirements remain specific to the business and the decision at hand.

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Funding FAQ

Start with the questions that most often shape a grant, incentive, tax credit, or financing conversation.

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What is the difference between a grant, a tax credit, and a loan?

A grant or incentive can be non dilutive support subject to a program’s specific terms. A tax credit may reduce a qualifying tax obligation under applicable rules. A loan is repayable financing that remains subject to lender underwriting and approval. Each source has different timing, documentation, and conditions.

Do small and medium sized businesses qualify for grants?

Some businesses may qualify when their project, location, ownership, industry, size, and planned use of funds match an active program. A grant is not automatic. The controlling funding notice and administering agency determine eligibility and timing.

What is a funding readiness review?

It is a structured review of the business goal, use of funds, financial position, project timing, operating cycle, available documents, and potential grant or incentive angles before a lender or program application is pursued.

Can grants and financing be used together?

They can sometimes be considered in one capital plan. A grant or incentive may change the size or timing of a financing need, while lenders and programs apply their own rules. The interaction must be reviewed for the specific company and transaction.

What does a lender ready funding package include?

The package usually starts with a clearly defined use of funds and may include financial statements, tax returns, debt details, accounts receivable information, forecasts, ownership information, collateral detail, and the business case for repayment. Requirements vary by lender and transaction.

Does Asgard USA lend money directly?

No. Asgard USA is an advisory firm. Financing is arranged only with appropriate lenders and remains subject to their underwriting, documentation, and approval process.

How does an SBA loan differ from a conventional business loan?

SBA programs support lending through participating lenders and program partners. The business still needs to meet applicable SBA and lender requirements, repay the financing, and complete the lender’s underwriting process. The suitable program depends on the use of funds and facts of the business.

Can a business claim a U.S. research credit for any innovation work?

No. Research credit eligibility is fact specific. It depends on the work performed, costs, records, tax position, and current federal and state rules. A qualified U.S. tax professional should review the facts and filing approach.