Before Your Engineering Firm Closes the Books: A Year-End R&D Credit Checklist

TL;DR

• The fourth quarter is the cheapest time to capture this year's R&D: the projects are still fresh, the engineers who did the work are still around, and the records can still be organized while the year is open.
• Form 6765 now asks for business-component-level detail in Section G. Depending on your firm's size, Section G may or may not be required on your return, but naming your projects and splitting the time behind them is what supports the claim either way.
• A few hours of principal-level attention now can turn into a claim that is easier to file on your original return, rather than something you go back and chase on an amended one.

Why the fourth quarter matters for an engineering firm

Most engineering firms do not think of themselves as running an R&D program. They think of themselves as delivering projects. But the federal research credit under IRC Section 41 is claimed by business component, and for a design firm a business component is often a project or a piece of one: a foundation system for an unusual soil profile, a mechanical design that had to hit an energy target nobody on the team had hit before, a control scheme that took three iterations to stabilize.

The problem with claiming that work in March is that by March the team has moved on. The alternatives that were evaluated and rejected, the calculation runs that did not converge, the test that sent the design back to the drawing board: these details fade fast. The credit does not require perfect records, but it does require a credible link between the activity, the people who did it, and the cost. That link is easiest to build while the year is still open.

What follows is a checklist a principal or CFO can work through in the last quarter, whether the firm is planning its first claim or its fifth.

1. Write down this year's business components while people still remember them

Start with a project list for the year. Then, project by project, ask one question: did the team face a real technical uncertainty at the start, one where the answer was not available in a code, a manufacturer's table, or the firm's own past work? Where the answer is yes, that project (or the specific system within it) is a candidate business component.

For each candidate, capture a few sentences: what the uncertainty was, what alternatives were considered, how the team evaluated them, and what the outcome was. This does not have to be formal. A short paragraph written by the project engineer in October is worth more than a polished narrative reconstructed from invoices in April, because it was written close to the work.

This also lines up with a change on the form itself, which is the next item.

2. Understand what Form 6765 Section G now asks for

The IRS redesigned Form 6765, the form used to claim the credit, and added Section G, which reports qualified research expenses by business component. According to the IRS instructions for Form 6765 (Rev. December 2025), Section G was optional for tax years beginning before 2026 and is required for tax years beginning after 2025, subject to exceptions.

Two exceptions matter for firms of Strata's typical client size. Per the instructions, Section G is not required if you are a qualified small business claiming the reduced payroll tax credit, or if your total qualified research expenses at the controlled-group level are $1.5 million or less, your average annual gross receipts for the prior three years are $50 million or less, and you are reporting the credit on an original return. Many engineering firms in the $3 million to $15 million revenue range may fall inside that second exception on an originally filed return. Note the last condition, though: the exception is tied to an original return. The instructions separately require business-component information for amended returns that claim a credit not reported on the original, which is one more reason to get the claim onto the original filing.

If Section G does apply, the instructions describe what it wants: business components listed in descending order of qualified expense until you have covered at least 80 percent of total QREs or 50 components, whichever comes first, with the remainder reported in aggregate. For each listed component, the form asks for an identifier that is consistent with how you keep your books and records, a component type (product, process, or other), and wages split three ways: people engaged in the actual conduct of the research, first-line supervisors of that research, and people providing direct support. Supplies, computer rental, and contract research are reported per component as well.

Even if your firm is exempt this year, that structure is a useful description of what the IRS considers a well-organized claim. If your year-end project list already names the components and identifies who worked on them, you have done most of the hard part regardless of whether Section G is required.

3. Pull this year's contracts and read the research clauses

For engineering firms, the most common reason a project drops out of a claim is not the four-part test. It is the contract. Treasury Regulation 1.41-4A(d) treats research as "funded" by a client, and therefore excluded, when the firm's payment is not contingent on the success of the research or the firm does not retain substantial rights in the results. Fixed-fee agreements with strong client ownership language can push otherwise qualifying work out of the claim; agreements where the firm bears the technical risk and keeps the right to reuse what it learned can keep it in.

Before year-end, have someone pull the agreements behind your candidate projects and flag the payment terms and the intellectual property clauses. You are not changing anything retroactively. You are finding out, before you invest time in a study, which projects are likely to survive the funded-research analysis and which are not. If the firm is negotiating new master agreements for next year, this is also the moment to understand how standard language affects future claims, with your attorney's input.

4. Check how time is being tracked, and fix it for next year if needed

Most engineering firms already bill by the hour, which means they already have project-level timesheets. That is a real advantage. The question is whether the timesheets can distinguish qualifying activity (design iteration, analysis, modeling, testing) from non-qualifying activity on the same project (construction administration, routine permit drawings, client meetings about scope and budget).

If your phase codes or task codes already make that distinction, note it. If they do not, you do not need to rebuild your system before year-end. Contemporaneous timesheets plus a project engineer's allocation of how the hours split are commonly used to establish the connection between wages and qualified activity. What you can do now is decide whether next year's task codes should be set up to make that allocation cleaner.

Treasury Regulation 1.41-4(d) addresses recordkeeping, and it is worth reading directly: 26 CFR 1.41-4.

5. Know how the deduction side changed, and talk to your CPA about it

Separate from the credit, the treatment of research costs on the deduction side changed for tax years beginning after December 31, 2024. Under new Section 174A, domestic research and experimental expenditures may generally be deducted in the year paid or incurred, with an option to elect amortization instead. The IRS published procedures for the related elections in Rev. Proc. 2025-28.

Why does this belong on a year-end checklist? Because the population of costs treated as research expenditures for deduction purposes overlaps with, but is not identical to, the population that qualifies for the Section 41 credit. Identifying your research projects now helps both conversations. Strata works with the client's CPA directly on how the credit interacts with the return; the deduction-side elections are a decision for your CPA and your firm.

6. Work backward from your filing date

The recurring dates are the same every year, and the credit is claimed on the return, so they set your planning window. For calendar-year partnerships and S corporations, the original due date falls around March 15 and the extended date around September 15. For calendar-year C corporations, and for the individual owners who receive pass-through credits on their K-1s, it is around April 15 and October 15. Fiscal-year filers have their own dates, and your CPA will confirm yours.

A typical study runs roughly four to eight weeks once documents and inputs are in hand, depending on the firm and the specific facts. Starting the conversation in the fourth quarter means the study can run while the team's memory is fresh and land well before the return is prepared, with no compression at the end. That is a convenience point, not a quality point; it simply keeps the credit from becoming one more thing competing for attention in filing season.

One more item on this list: if your firm has done this kind of work in prior years and never claimed the credit, those years may still be open. The general rule under IRC Section 6511 allows a refund claim within three years of the filing date, and the IRS explains the time limits on its page about when you can claim a credit or refund. Amended-return claims carry their own documentation requirements, so ask about those years at the same time you ask about the current one.

What this looks like in practice

None of the six items above requires an engineering firm to change how it does engineering. They require a principal to spend a few hours in the fourth quarter naming the projects that involved real technical uncertainty, pulling the contracts behind them, and confirming that the timesheets can connect people to that work. That is a modest ask, and most of the remaining work sits with the provider.

Strata's initial assessment costs $0 and is built to answer one question first: is there enough here to be worth a study at all? Because Strata works with the client's CPA directly, the answer can fold into the return process rather than sitting outside it. If you would like that conversation before the year closes, reach out at stratataxgroup.com/contact.

This post is for informational purposes only and does not constitute tax or legal advice. Consult a qualified tax professional regarding your specific circumstances.