Ways to Improve Cashflow with R&D Tax Credits

We are all crazy busy—the height of tax season means weekends blending into the regular week. The crush of work gives us all little time to think. However, an ounce of prevention is worth a pound of cure. And in business, cash is king, especially in rocky economies. 

How can R&D tax credits help clients hang onto more cash? By thinking through how to accelerate and maximize the R&D tax credit now and the cash it can deliver. Below are some quick ideas to help make short work of figuring out how the R&D tax credit can best help your client’s cash flow.

Put the Credits on the Original Return

Even if your client doesn’t need the credits now, the option to go back and amend a year to pick up credits doesn’t work the way it used to. Five or ten years ago, amending a return might have taken six to nine months to process, which seemed manageable.  Today, the wait is two years plus. This means that if a taxpayer waits a year to amend, the refund check could be three years away from today.

 By contrast, if the credits are included on the original 2025 return, the return is processed within about 90 days, and the credits are posted to the taxpayer’s account. At that point, the taxpayer can use the credits right away.

So if the client is likely to need money within the next 12-18 months, claiming the credits on the return now can significantly speed things up. In a variation of an old saying, an ounce of taxplanning is worth a pound of cure.

Factor into Quarterly Estimated Tax Payments

The most immediate use of the credit is to reduce the client’s 2026 quarterly estimated tax payments. This starts, obviously, with the April 15th extension payment because quarterlies are due at the same time, usually a double whammy to the taxpayer. Plus, if they expect to qualify for credits again in 2026, the anticipated 2026 credits can be combined with those from 2025 to reduce estimated tax payments by as much as 75%. 

Low Tax Liability in 2025, but High in 2024?

Tentative Refund Claim for Carryback Credits

For the client who can’t use credits on their 2025 return but had a meaningful tax liability in 2024, the carryback process is a blessing. In this situation, without amending 2024, the taxpayer can utilize a Form 1045 (or Form 1139, if a C-Corp) to request a tentative refund. These forms are electronically filed and, historically, have been processed within 90 days.

Receiving a refund from 2024 at roughly the same time the client receives their 2025 refund can make a real difference in the client’s cash flow.

Avoid Speed Bumps: Pre-Processing Delays

Some may have heard about a new IRS filing requirement where taxpayers must attach documentation identifying who worked on each project claimed, what they sought to discover, and what activities were performed. If so, you probably also heard that the IRS postponed the requirement until 2026 returns are filed—a stay of execution and a sigh of relief.

There is one small problem. The IRS has started requesting that information before processing some returns through what is commonly referred to as the “45-day letter.” Not only does this delay the return, but often the client is so busy that they cannot do justice to collecting and writing up the information the Service needs. As a result, valid credits can be rejected before an audit is ever called.

For that reason, we recommend including this documentation with every original return. This has been our standard practice since the Chief Counsel announced the requirement in the fall of 2021. Doing the work up front avoids bigger problems down the road.

Reasons for Credits Not Being Maximized

Insufficient Written Documentation

Having a bunch of engineering files is not the same as having documentation that will satisfy the IRS. CPAs instinctively know this and avoid claiming anything that does not look like breakthrough technology. That mindset reflects what was once known as the “novelty standard,” the idea that the technology had to be new to the world. However, this standard was removed from the law many years ago, and, most importantly, the IRS has acknowledged that it is no longer the benchmark.

The solution is for CPAs to make sure their provider has the technical writing staff to build out project-level reports. Many R&D firms have a token number of people who can produce technical write-ups. In practice, properly supporting an R&D study requires about five technical writers for every CPA involved. Spreadsheets and calculations can be put together fairly quickly, but preparing detailed reports for 20 or more projects is far more time-intensive. Without that capacity, credits are often understated or left unclaimed.

Missed Opportunities

Facility Cap Ex Projects

A common issue arises when the company lacks adequate engineering files. This is especially true when a client undertakes a significant capital expenditure to modernize or expand their production capacity. Most of the documents needed are held, not by the taxpayer, but by the subcontractors. Chasing down subcontractors is like herding cats: clients do not have the time or patience for it.

A boutique R&D tax credit provider has the experience and resources to pursue these records and work with each subcontractor to gather the necessary information. Just as importantly,  they can prepare the project-level write-ups that clearly explain how each aspect of the facility build satisfies the four-part test, making it much easier for an IRS examiner to understand and approve the claim.

Custom Engineering Companies

These are companies sometimes referred to as Engineer-to-Order (E-T-O) providers. Many times, for these companies, everything they do is eligible for the R&D tax credit. However, documentation is often limited, and project-level write-ups showing how the work meets the R&D standard are almost nonexistent—engineers don’t have the time, desire, or means to learn what the IRS needs to see to approve an individual project.

CPAs tend to shy away from claiming everything but the novel projects out of concerns that the client could have the credits taken away. Compounding the matter, the owner is often an engineer and views R&D as only the most groundbreaking work. In reality, many custom-engineered fixed-fee projects may qualify. Even if a CPA knows this and can help the client understand the wider net cast by R&D eligibility, the resulting credits can become large enough that both the CPA and client get uncomfortable claiming the full amount without strong IRS-friendly documentation. This is understandable and wise, but not necessary if the R&D tax credit advisory firm supporting the study has a deep team of writers with extensive experience.

Tax Planning & Busy Season: Who has the time?

Yes, this is the height of the busy season, and there is little time to think beyond the next deadline. However, there is a big payoff for taking just a moment to identify your handful of clients who could benefit from some or all of these cashflow planning ideas. An ounce of tax planning is worth a pound of cure—and likely to warm the hearts of your clients.

Rick Kleban is the founder and president of Sycamore Growth Group, an Ohio-based firm specializing in federal and state research & development tax credits by providing elite written substantiation for credit claims. He also advocates at the federal and state levels to improve the credit to better incentivize innovation, which, in turn, grows the tax base and helps communities.

Jenna Tugaoen is a tax attorney at Sycamore Growth Group, an Ohio-based tax advisory firm that specializes in assisting businesses in attaining and substantiating R&D tax credits.

James Bean, CPA, is a senior researcher and R&D tax controversy specialist at Sycamore Growth Group.