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Businesses developing products, improving processes, testing prototypes, or creating software may already be performing activities that qualify for the R&D tax credit. A properly prepared R&D tax credit study can identify those activities and related qualified research expenses, potentially reducing federal and applicable state income tax liabilities. The resulting savings can improve cash flow through lower tax payments or potential refunds for eligible open tax years, giving businesses additional capital to reinvest in hiring, product development, equipment, software, and continued innovation.
KBKG Insight
A strong R&D credit study does more than calculate a potential tax benefit. It creates a repeatable process for connecting a company’s technical activities with qualified costs and supporting documentation. Companies that establish this process can more consistently identify eligible projects, capture qualifying expenditures, and build the technical and financial support needed for a defensible research tax credit claim. Developing that process throughout the year can also make the R&D credit a more useful component of ongoing tax planning.
Key Takeaways
- A properly prepared R&D tax credit study can reduce federal and applicable state income tax liabilities, improve cash flow, and potentially generate refunds for eligible open tax years.
- Qualifying value may already exist in activities such as product development, process improvement, software development, prototyping, testing, and technical experimentation.
- KBKG’s dedicated R&D tax credit experts combine technical and tax expertise to identify qualifying activities, calculate eligible expenses, develop defensible documentation, and support businesses and their CPAs throughout the R&D credit process.
Background
The federal research tax credit generally applies to qualified research involving the development or improvement of a business component, such as a product, process, formula, technique, invention, or software. Activities generally must satisfy requirements related to technological principles, elimination of uncertainty, permitted purpose, and a process of experimentation. Companies may overlook opportunities because these activities are often part of everyday operations. Designing a better product, experimenting with a manufacturing process, developing or improving software, evaluating alternative designs, and building and testing prototypes can potentially qualify when the applicable requirements are met.
A well-prepared study identifies eligible activities, determines qualified research expenses, calculates the R&D credit, and develops documentation connecting the technical work to the expenditures claimed. This consistent approach can strengthen long-term tax planning and improve audit readiness and defensibility. An R&D tax credit study does not guarantee that a business will face a lower likelihood of examination. Strong documentation provides support for the claim if the IRS or a state taxing authority asks questions. The IRS specifically evaluates study methodology, documentation, and other substantiation when examining research credit claims.
Eligible startups can receive an additional cash-flow benefit before they become profitable. A qualified small business may elect up to $500,000 of its federal research credit annually against certain employer payroll taxes, subject to eligibility requirements and available credit. For this purpose, a qualified small business generally must have less than $5 million of gross receipts for the credit year and no gross receipts before the applicable five-tax-year period.
Conclusion
An R&D tax credit study can uncover tax value in innovation a company is already pursuing while creating a disciplined process for future claims. By identifying qualifying activities, accurately connecting expenses to those activities, and maintaining appropriate documentation, businesses can pursue federal and state R&D tax benefits with stronger support. The resulting cash savings can be reinvested directly into people, technology, equipment, product development, and the next generation of innovation.
Action Steps
Businesses and their CPAs should review current product development, engineering, manufacturing, software, and process-improvement activities to determine whether qualifying research may be occurring. Establishing a consistent annual process for identifying projects, tracking expenses, and retaining supporting documentation can make future R&D credit studies more efficient and strengthen the company’s overall tax planning.
Explore KBKG’s R&D Tax Credit qualifying activities guide or review 5 Reasons to Claim the R&D Tax Credit in 2026 for additional insights.
If you or your company have questions, or are ready to explore R&D tax credits, you can request a free, no-obligation consultation with KBKG’s experts here.
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Frequently Asked Questions
An R&D tax credit study evaluates a company’s technical projects and related expenses to determine which activities may qualify for the federal and applicable state research tax credits. The study typically connects qualifying activities with eligible wages, supplies, certain computer costs, and contract research expenses while developing documentation to support the credit calculation.
Potential qualifying activities can include developing or improving products, manufacturing processes, formulas, software, engineering designs, and prototypes, as well as technical testing, modeling, simulation, and experimentation. Eligibility depends on the specific facts and whether the activities satisfy the applicable R&D tax credit requirements.
Yes. An eligible qualified small business can elect to apply up to $500,000 of its research credit annually against certain employer payroll taxes, subject to the applicable eligibility requirements and available credit. This can allow qualifying startups to benefit from the R&D credit while they are still investing in growth and before they generate enough taxable income to fully use an income tax credit.