1. What the IRS Expects—Translated for Business and Engineering Teams

To qualify research activities, you need to describe them in a way that connects the technical story to the credit calculation.

A concise technical narrative that showcases the project, explains the problem, the uncertainty, the alternatives considered, and the experiments performed. A business component write-up that names the product, process, software, technique, or formula you’re developing or improving, describes the baseline, and defines the targeted improvement in function, performance, reliability, or quality.

2. Why the Emphasis on Documentation?

The IRS has long required taxpayers to keep records that substantiate credits and deductions. Recent guidance and updates have renewed attention to R&D documentation. 



In practice, this means the Service is seeking greater clarity: what the business component was, what technical uncertainty existed, what alternative approaches were evaluated, and which expenses are tied to that work. Companies that prepare for these expectations avoid scrambling and protect their credit.

3. Build an Audit-Ready Process (Without Slowing Projects)

Here’s a framework we deploy with clients that blends into normal engineering and product workflows. It is designed to be light-touch, repeatable, and credible.

Step A: Identify and Register R&D Projects Early

Our team works with technical leaders within our clients to create a business component, capture the high-level objective, and flag initial technical uncertainty. Registering projects early makes documentation contemporaneous by default and reduces after-the-fact guesswork.

• What business component is being developed or improved?
• What success looks like (function, performance, reliability, or quality metrics).
• What technical uncertainty exists at the start (capability, method, or appropriate design)?
  

Step B: Maintain a Living Technical Narrative

We will then document hypotheses, tests, iterations, failures, and outcomes. Then, we will summarize them into clear technical narratives.

Example: For a software project aiming to improve data throughput, the narrative might state: 'Objective: Increase throughput by 50% without latency issues. Uncertainty: Could the current architecture scale? Experiments: Benchmarked three architectures, documented failures and pivots.'

State the uncertainty: e.g., ‘Can we achieve X throughput without exceeding Y latency?’ or ‘Will encapsulant B preserve signal integrity?’

List options evaluated: architectures, chemistries, materials, algorithms, or process parameters.

Summarize experiments: what you changed, how you measured, and what happened—including failures.

Document pivots: design changes or new approaches as lessons are learned.

Step C: Document the Business Component Clearly

A common gap is the use of vague or overly broad definitions of business components. Name the specific component and distinguish experimental improvements from routine maintenance or production tuning.

Targeted improvement: what you aimed to change and why it mattered for the business.



Why experimentation was necessary: what made the path uncertain at the outset.

Step D: Assemble the Project Report

For the efforts, we will create a technical report, business component description, artifacts, and cost linkage.

Key Areas Covered in Technical Reports

A. Business Component

• Component name
• Baseline description (function, performance, reliability, quality)
• Targeted improvement and business rationale
• Technical uncertainty statement (capability/method/design)
• Why experimentation is required (alternatives under consideration)

B. Technical Narrative Outline

• Project objective
• Initial uncertainty and risks
• Hypotheses/alternatives
• Experiments (setup, metrics, results)
• Design pivots
• Outcome and next steps
  

FAQs (Short, Practical Answers)

How much documentation is enough?  Enough to show uncertainty, experimentation, and who performed the work, with costs tied to projects. Clarity beats volume if artifacts support the narrative.

Can we fix gaps from prior years?  Often yes. While contemporaneous documentation is preferred, missing pieces can usually be reconstructed with guidance, especially when technical details are available.

STG’s Approach: Experienced Guidance, Light Workload for Your Team

• Engineer-to-tax translation: we interview technical staff and convert their language into narratives.
• End-to-end support: identification, documentation, and preparation throughout the process

Most importantly, we keep the process positive and business-friendly. The R&D credit is meant to reward innovation. With the proper preparation, you can pursue ambitious work while meeting the documentation standards confidently with minimal effort from your team.

Common Pitfalls to Avoid:

• Missing uncertainty statements—always document what was unknown.
• Ignoring failed experiments—these strengthen your claim.
  

The IRS’s shift toward more explicit technical write-ups and business component documentation is about clarity, not punishment. Companies that organize their documentation now will remain fully compliant and often may expand their credit by recognizing more qualifying activity. 

Work with experienced professionals to set up a simple framework, and your teams can focus on innovation while your claim stays strong. Contact STG today to schedule a 30-minute consultation and ensure your R&D credit is fully optimized.