Starting with tax year 2026, the IRS wants your R&D tax credit broken down by project, not reported as one lump number. If your engineers are logging time to a department code instead of a project or sprint, you already have a documentation gap, and the fix has to start before your books close, not when your accountant asks for it.
That's the part most founders miss. The credit itself hasn't gotten smaller. The bar for proving you earned it just got higher.
What actually changed for 2026
Form 6765's Section G now requires business-component-level reporting: the IRS wants to see what you built, why it involved technical uncertainty, and what it cost, broken out project by project instead of rolled into a single company-wide number. This was optional for tax year 2025. For 2026 and beyond, it's mandatory for most filers.
Practically, that means your qualified research expenses (QREs) need a paper trail that connects a dollar of payroll to a specific piece of research, not just to an "engineering" line item. If your current time tracking stops at the department level, Section G is where that falls apart at filing time.
The mistake: treating this as your accountant's problem
Founders hand their accountant a QuickBooks export in March and assume documentation is a bookkeeping exercise. It isn't. Your accountant can't reconstruct which sprint was genuine technical experimentation and which was a UI tweak six months after the fact. Only your engineering team knows that in real time.
The four-part test under Section 41 that determines whether work qualifies (technological in nature, aimed at eliminating uncertainty, involving a process of experimentation, tied to a business component) has to be applied while the work is happening, not reconstructed from memory during tax season. Waiting until filing season to document research activity is the single most common reason legitimate claims get trimmed or denied on audit.
There's a second mistake stacked on top of the first: assuming offshore engineering time counts. It doesn't. Research performed outside the United States is excluded from the credit entirely, no matter how core it is to the product. If part of your team is contracted overseas, that cost has to be separated out before it ever reaches your QRE total.
The exact system to put in place this week
You don't need R&D credit software to fix this. You need two short messages, sent once, and one recurring habit.
1. The message to send engineering (today):
"Starting this sprint, tag every ticket with a project code, not just a department code. If you're writing code to solve a problem where the outcome wasn't obvious going in, whether that's a new feature, a performance rework, or an integration that doesn't have a known solution, flag it. We're tracking this for the R&D tax credit, and the IRS now wants it broken out by project."
That single Slack message, sent once and pinned, does more for your documentation than a $400/hour tax attorney reconstructing Jira history in Q1.
2. The message to send your bookkeeper or accountant (this month):
Ask them directly: "Can you confirm whether our 2026 R&D credit workpapers will be prepared using Form 6765 Section G's business-component format, and what project-level detail you need from engineering to support it?" If the answer is vague, that's a signal to get specific before year-end, not after.
3. The habit: a monthly five-minute reconciliation.
Once a month, pull the list of tickets tagged as research and match them against payroll and any contractor invoices tied to that work. This is the traceability the IRS is actually asking for: a clean line from a dollar in the general ledger to a specific research activity and the person who did it.
What this looks like in practice
A 12-person SaaS team I've talked through this with was logging all engineering time under a single "Product" cost center. Nine months of work, one number. When their accountant asked for a Section G breakdown, they had to go back through commit history and stand-up notes to reconstruct which quarters were genuine experimentation (a new sync engine with no clear reference architecture) versus routine maintenance (bug fixes, minor UI updates).
It took three weeks to rebuild what would have taken five minutes a month if the tagging habit had existed from the start. The credit amount didn't change. The hours spent defending it did.
What to do first
Send the engineering message above today. It costs nothing and takes less time to write than this article took to read. Everything else, the Section 174 coordination, the QSB payroll offset election, the provider vetting, only matters if the underlying activity was tracked accurately in the first place. Documentation is the foundation the rest of the credit sits on.
Frequently asked questions
Do I need new software to track R&D tax credit documentation? No. A project or ticket tagging convention in whatever tool your engineers already use (Jira, Linear, GitHub Issues) is enough, as long as it's applied consistently and reconciled monthly against payroll.
Does offshore or contracted engineering work qualify for the R&D tax credit? No. Only research performed inside the United States qualifies. Foreign research costs are excluded from the credit entirely and, separately, must be amortized over 15 years under Section 174 if capitalized.
What's the difference between Section 41 and Section 174 for R&D purposes? Section 41 determines the size of your tax credit. Section 174 determines how research expenses are deducted or amortized. Domestic research expenses can generally be deducted immediately starting in 2025; foreign research costs still amortize over 15 years. You need both figured separately.
Is Form 6765 Section G reporting mandatory for every startup? It became mandatory for most filers starting with tax year 2026, after being optional for 2025. Confirm your specific filing threshold with your tax preparer, but plan your documentation habits as if it applies to you.
What happens if I don't have project-level documentation at filing time? You can still claim the credit, but you're at higher risk of the claim being reduced or challenged on audit, since you won't be able to show which specific costs tie to which qualifying research activity.
Can I start project-level tracking mid-year and still benefit? Yes. Start now. Retroactively reconstructing a prior period is possible but expensive and imprecise. Every month you track cleanly going forward is a month you don't have to rebuild later.