What is the Research and Development (R&D) Tax Credit?

The R&D Tax Credit (26 U.S. Code §41) is a federal benefit that provides companies dollar-for-dollar cash savings for performing activities related to the development, design, or improvement of products, processes, formulas, or software. This credit provides much needed cash to hire additional employees, increase R&D, expand facilities, and more. The credit was enacted in 1981 to stimulate innovation and encourage investment in development in the US. Since then, many states have also passed the R&D Tax Credit. As such, this benefit is available across a wide variety of industries. Some of the common industries that qualify include, but are not limited to:

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Use our calculators for an estimate of state and federal benefits or to determine if you can offset payroll tax using the R&D tax credit. It's easy to use and free. If at any time you have questions, contact us. We are here to help you realize your maximum tax benefit.


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What are the Potential Benefits of the R&D Tax Credit?

There are several benefits to realizing the R&D tax credit. These benefits can include the following:

  • Receive up to 12-16 cents of federal and state R&D tax credits for every qualified dollar
  • Create a dollar-for-dollar reduction in your federal and state income tax liability
  • Increase earnings-per-share
  • Reduce your effective tax rate
  • Improve cash flow
  • Carry forward the credit up to 20 years
  • Perform look back studies to recognize unclaimed credits for open tax years (generally 3 or 4 years)
  • Utilize the federal R&D tax credit against payroll tax (applicable to certain startup companies)

Why the R&D credit delivers dollar-for-dollar savings

The difference between credits and deductions confuses many business owners, and it's worth getting clear on. A deduction lowers the income you're taxed on. A credit lowers the actual tax you owe. Think of it this way: if your company is in the 21% tax bracket, a $100,000 deduction saves you $21,000. But a $100,000 credit? That saves you the full $100,000. This distinction makes the R&D credit one of the most valuable incentives available to businesses investing in innovation.

How to Claim the R&D Tax Credit?

Claiming the credit requires filing the right forms and maintaining solid documentation to support your position.

  • Form 6765: Filed with your federal tax return (e.g., Form 1120), this form reports your Qualified Research Expenses (QREs), calculation method, and total credit. Startups electing the payroll tax offset complete Section D.
  • Documentation: Strong records are critical and typically should include financial records such as payroll, general ledger, invoices, and supply costs; technical support like project plans, designs, testing results, and correspondence; and time tracking that clearly shows how employee hours are allocated to R&D activities.

State R&D incentives can be claimed in addition to the federal credit, often on the same expenses. Programs vary by state, with differences in credit rates, eligibility, and carryforward rules. Some states offer refundable credits or enhanced benefits for smaller businesses, making them especially valuable even without current tax liability.

Four-Part Test

Qualified research activities are defined by the four-part test outlined below

  • Technological in Nature

    Activities must fundamentally rely on the principles of physical or biological science, engineering, or computer science. 

  • Permitted Purpose

    Activities must be performed in an attempt to improve the functionality, performance, reliability, or quality of a new or existing business component.

  • Eliminate Uncertainty

    Activities intended to discover information that could eliminate technical uncertainty concerning the development or improvement of a product. 

  • Experimentation

    All of the activities must include a process of experimentation including testing, modeling, simulating, systematic trial and error. 

What does not qualify as R&D

Certain activities fall outside the credit's scope, even when they seem research-related.
Common exclusions include research conducted after commercial production begins, adaptation of existing products for a specific customer, funded research where another party retains rights or bears the risk of loss, research performed outside the United States, and social science or market research.

Research and Development Tax Insights

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