Last Updated on 06/18/2026
Everything You Need To Know About R&D Tax Credits
Business owners often consider taxes an inconvenient but necessary part of everyday operations. However, a better understanding of the R&D tax credit, formally the Research and Development tax credit, can translate directly into significant cash savings. Following the One Big Beautiful Bill Act (OBBB Act) signed into law on July 4, 2025, immediate expensing of domestic research costs has been permanently restored, making the credit even more valuable.
Below is an in-depth look at how the R&D tax credit works, who qualifies, how to claim it, and what recent legislative changes mean for your business.
What Is the R&D Tax Credit?
The Research and Development tax credit is a federal tax incentive that provides a dollar-for-dollar reduction in tax liability for businesses that incur qualified domestic research expenses. Qualifying activities include the development, improvement, or design of a product, technique, process, or software.
This credit can lead to substantial savings that free up capital for further R&D, hiring, and growth. For companies that meet the criteria of a Qualified Small Business (QSB), the R&D credit can be used to offset quarterly payroll taxes. Under the OBBB Act, the QSB gross receipts threshold has been raised from $5 million to $31 million, dramatically expanding eligibility. QSBs may apply up to $500,000 per year in R&D credits against payroll taxes, subject to a $1.25 million aggregate cap over five years.
More than 30 states also offer their own R&D tax credits, which can provide additional savings on top of the federal benefit. See KBKG’s R&D Tax Credit Benefits by State for a full breakdown.
Who Qualifies for the R&D Tax Credit?
This lucrative credit is available for more than established researchers and scientists. Small businesses can also reduce tax liability for eligible expenses tied to innovation. Any company working within the United States to develop or improve a process or a product can claim the credit, no matter what industry it is in.
For more details, visit KBKG’s R&D Qualifying Activities page.
How Is R&D Different from R&E?
The Research and Development tax credit is also known as the Research and Experimentation (R&E) tax credit. These two terms refer to the federal benefit outlined in Section 41 of the Internal Revenue Code.
What Is the Four-Part Test for R&D?
The IRS uses a four-part test to determine whether a business activity constitutes qualified research:
- Permitted purpose: Qualified activities work to improve a new or existing product or process’s functionality, reliability, quality, or performance.
- Technological nature: The activities rely on the principles of physical science, computer science, biological science, or engineering.
- Eliminate uncertainty: The activities make improvements that lead to eliminating technical uncertainties regarding a product’s capabilities, design, or method.
- Experimentation: The activities involve experimenting through processes like testing, simulating, and trial and error of hypotheses.
If your proposed activity meets the above criteria, it likely qualifies for the R&D credit.
What Are the IRS Rules for R&D Tax Credit?
Businesses can claim R&D credit for activities that fall into two categories:
- Qualified research activities or qualified research expenses (QREs)
- Basic research payments
While many large businesses take advantage of this credit, smaller businesses often forego extensive tax savings because they aren’t aware they qualify. This is why it is beneficial to work with a professional firm knowledgeable in the R&D tax credit, such as KBKG, to make sure you aren’t failing to claim eligible expenses.
How Do R&D Tax Credits Work?
The tax code for this credit works in two ways, by allowing a company to deduct R&D expenses in the first year or to get a tax credit for qualifying expenses.
Claiming the R&D tax credit requires that you submit certain documentation to prove your eligibility. Some examples are payroll records for your R&D employees and expense accounts with receipts, blueprints, prototypes, and notes from project meetings.
What Types of Expenses Qualify for the Credit?
A variety of expenses qualify for the R&D tax credit:
- Wages to research and development employees. Under the IRS’s 80% “substantially all” rule, if at least 80% of an employee’s time is spent on qualified research, 100% of their wages count as QREs.
- Contract research costs paid to third parties performing qualified activities on your behalf. Note: only 65% of contract research expenses count as QREs for credit calculation purposes.
- Cloud computing costs for leasing computing environments used to develop or test software and technology.
- Research payments to a qualified scientific organization or educational institution.
- Supplies required for the research and development of new products and technologies.
Some expenses are excluded:
- Research started after commercial production began
- Duplication of an existing product
- Market research, such as surveys
- Research done outside of the United States
- Research regarding software used for internal purposes
- Research already funded by a grant, organization, or the government
- Research in the arts, humanities, or social sciences
What Are Examples of R&D Tax Credits?
The R&D tax credit applies across a wide range of industries. Common qualifying activities include:
- Designing cloud-based software solutions
- Developing new products or improving existing ones
- Developing or improving a manufacturing process
- Testing or beta testing a product or process
- Conducting research and documenting the results
Manufacturing: A mid-size manufacturer redesigning its production line to improve efficiency and reduce defects may claim credits on engineer wages, prototype materials, and testing costs.
Software and Technology: A SaaS company developing new features, improving system architecture, or building third-party integrations can claim wages for developers and QA engineers, plus cloud infrastructure costs used in development.
Engineering and Construction: Firms developing proprietary design methods, testing new materials, or engineering solutions for complex structural challenges frequently qualify.
For more details on qualifying activities, visit KBKG’s R&D Qualifying Activities page.
How Are R&D Credits Calculated?
The IRS provides two primary methods for calculating the R&D tax credit. Businesses should calculate using both and claim whichever yields the greater benefit.
Alternative Simplified Credit (ASC) method: The credit equals 14% of the difference between the current year’s QREs and 50% of the average QREs from the prior three years. New businesses without three years of history can multiply the current year’s R&D expenses by 6%.
Regular Research Credit (RRC) method: The credit equals 20% of QREs that exceed a base amount tied to historical spending and gross receipts. For companies with a longer operating history, this method can sometimes produce a larger credit.
It’s a good idea to consult a tax specialist to ensure you take full advantage of the credit. You can also estimate your R&D credit using KBKG’s online calculator.
How Do You Fill Out Form 6765?
Form 6765 instructions on the IRS website guide you through figuring out and claiming the credit. Collect the following to help you work through the form more easily:
- Profit and loss statements
- Expense receipts for R&D activities
- Invoices
- Balance sheets
New Reporting Requirements
Starting with tax year 2024, the IRS added new sections to Form 6765 requiring more granular reporting:
- Section E asks for the number of business components, total QREs, and officer wages related to research.
- Section F requires a summary of total QREs across all business components.
- Section G (mandatory for 2025) requires a component-by-component QRE breakdown; unless total QREs are under $1.5 million and gross receipts are below $50 million. Payroll-tax-eligible QSBs are also exempt.
These additions increase the documentation burden, so maintaining organized records throughout the year is critical.
What Is R&D Tax Credit Amortization?
The treatment of domestic R&D costs under Section 174 has changed significantly in recent years.
In 2017, the Tax Cuts and Jobs Act (TCJA) introduced a requirement, effective January 1, 2022, that businesses capitalize and amortize domestic R&D expenses over five years instead of deducting them immediately. This drew widespread criticism from R&D-intensive businesses.
On July 4, 2025, the OBBB Act created a new Section 174A, permanently restoring immediate expensing for domestic R&D. Businesses can once again deduct qualifying domestic R&D costs in the year they are incurred. Foreign R&D expenditures remain subject to 15-year amortization under the original Section 174.
Transition rules for 2022–2024: Businesses that capitalized domestic R&D costs during the amortization period can recover remaining unamortized costs by deducting them entirely in 2025 or spreading the deduction across 2025 and 2026. Eligible small businesses may also retroactively amend their 2022–2024 returns.
Businesses claiming both the Section 174A deduction and the Section 41 R&D credit should be aware that Section 280C(c) requires coordinating the two; either by reducing the deduction by the credit amount or electing to take a reduced credit. Given the recency of the OBBB Act, consult a qualified tax professional for guidance on applying these provisions to your situation.
Who qualifies for the R&D tax credit?
Businesses across a wide range of industries may qualify for the R&D tax credit, including manufacturing, software development, engineering, life sciences, food and beverage, and architecture. To qualify, a company must have engaged in activities that meet the IRS four-part test: the activity must be technological in nature, intended to eliminate uncertainty, involve a process of experimentation, and relate to a new or improved business component.
Both large corporations and small businesses, including startups, may be eligible.
What are the reasons to claim the R&D tax credit?
The R&D tax credit is one of the most valuable incentives available to U.S. businesses. It directly reduces federal (and often state) tax liability dollar-for-dollar, which is more powerful than a deduction. Companies can use it to offset income tax or, for qualifying startups, payroll taxes. Credits can also be carried back one year or carried forward up to 20 years. Beyond the immediate tax savings, claiming the credit frees up capital that can be reinvested in hiring, equipment, and further innovation.
Do I qualify for the R&D tax credit?
You may qualify if your business has developed or improved products, processes, software, formulas, or techniques; even if the project was ultimately unsuccessful. Many companies don’t realize their everyday engineering, development, or testing activities count as qualifying research. The best way to determine eligibility is to have a qualified tax professional review your activities against the IRS four-part test. KBKG offers a free preliminary analysis to help you assess your potential benefit.
What Happens to Unused R&D Credits?
If your business has unused R&D credits because it lacks sufficient tax liability, those credits can be carried forward for up to 20 years under the Protecting Americans from Tax Hikes (PATH) Act.
How Far Back Can You Claim R&D Tax Credits?
Businesses can claim the R&D credit for any open tax years by filing an amended return. Typically, the lookback window is about three years, although it may be longer if you sustain losses.
If Our Company Has Had Losses but Incurred Qualified Research Expenses, Can We Utilize the R&D Credit Benefit?
One of the most common questions is, “Can you take R&D credit if you have a loss?” Yes — a company does not need to be profitable to claim the R&D tax credit. Companies operating at a loss can still benefit. As a loss-making company, you could potentially claim back a more significant percentage of your R&D expenditure than those that make a profit. You may also receive a cash credit rather than a reduction in your tax bill.
What Is the Timeline to Complete an R&D Study?
Knowing how and when to claim the R&D tax credit for an ongoing research and development project is essential. Understand that you can only claim the stages that involve technological uncertainty, such as product research, development, and testing. It’s crucial to keep detailed records to claim the appropriate expenses for work done during each tax period.
If you have not yet made a claim for prior years of an ongoing project, you may claim expenses for two years after the end of an accounting period.
If I Claim the R&D Credit, Will I Be Audited?
Claiming the R&D tax credit on an original return filed on time does not trigger an audit automatically, and R&D clients do not have a higher rate of audits than standard income tax returns for those claiming the credit on an original return. However, there is always the possibility of an audit, so you should have supporting documents available to prove your claim.
How Does KBKG Work With CPAs?
KBKG has offices nationwide, so you can get help with R&D tax credits wherever your business is located. The firm offers various services and software to CPAs and other businesses to help them understand which tax programs benefit clients most. Their services complement traditional tax and accounting teams by offering knowledge and expertise alongside your existing team as we work together to achieve greater value and savings. Learn more about partnering opportunities with KBKG.
How Will KBKG Help Me Stay Compliant as Laws and Regulations Are Changing?
Tax laws and regulations frequently change on a federal or state-by-state basis. It’s important to work with a company that understands how R&D tax credit rules vary from state to state.
KBKG helps you stay compliant by educating you on the newest regulations while providing valuable services that get you the most savings under the current laws. We continuously monitor changing laws and maintain federal, state, and local government relationships to provide you with the latest insights and support.
Final Thoughts: Can I Claim the R&D Tax Credit?
The R&D tax credit offers a dollar-for-dollar tax liability reduction and improved cash flow. With immediate expensing permanently restored and expanded QSB eligibility, the credit is more accessible than it has been in years. However, navigating recent changes, including new Form 6765 requirements and Section 174A coordination, often requires professional guidance.
See if you qualify for tax credits, deductions, or cost recovery services by requesting a proposal.