R&D Tax Credit - Qualifying Activities

Last Updated 07/30/2026

What Is the R&D Tax Credit? 

The R&D tax credit, established under Internal Revenue Code (IRC) Section 41, provides a dollar-for-dollar reduction in federal tax liability for businesses that engage in qualifying research activities. For tax years 2025 and 2026, businesses may claim the R&D tax credit for qualified research expenses (QREs) defined by Treas. Reg. 1.41-4 and claimed on the IRS Form 6765. 

Note: For tax years beginning after December 31, 2024, taxpayers may generally deduct domestic research or experimental expenditures in the year incurred under Section 174A. Foreign research or experimental expenditures must continue to be capitalized and amortized over 15 years under Section 174. Coordinating these rules with the Section 41 R&D tax credit remains an important part of effective tax planning. 

The Four-Part Test 

To qualify, research activities must generally satisfy the IRS four-part test under IRC Section 41 and Treas. Reg. 1.41-4. KBKG’s four-part test analysis evaluates each project (business component) against these four requirements to determine whether the work reflects qualified research rather than routine activites maintenance, or implementation. 

• Permitted Purpose: The activity relates to developing or improving the function, performance, reliability, or quality of a business component. 

• Technological in Nature: The activity relies on principles of engineering, physical science, biological science, or computer science. 

• Elimination of Uncertainty: The activity is intended to resolve uncertainty about capability, method, or appropriate design. 

• Process of Experimentation: The activity involves evaluating one or more alternatives through modeling, simulation, trial and error, prototyping, or other testing. 

Qualifying Activities 

KBKG’s R&D experts evaluate technical design, prototyping, software development, process improvement, testing, and validation activities across manufacturing, software, engineering, and other innovation-driven industries. 

Businesses that perform technical development, testing, evaluation, or improvement activities may want to exploreor improvement activities should evaluate whether they qualify for the R&D tax credit. Example qualifying activities may include: 

Design and Prototyping 

• Developing or improving products, processes, formulas, or software 

• Creating engineering designs, architecture, models, or prototypes 

• Building experimental models or sample units 

• Using CAD, 3D modeling, or similar technical design tools 

Testing and Validation 

• Assessing whether a new or improved concept is technically feasible 

• Testing experimental products, processes, formulas, or software 

• Conducting beta testing or other technical validation 

• Testing or applying new technologies 

Process Improvement 

• Improving manufacturing processes or product manufacturability 

• Creating more efficient or environmentally friendly designs 

Project Support 

• Participating in technical design reviews or technical meetings 

• Documenting research results and compiling research data 

• Maintaining equipment used for research or experimentation 

• Supervising technical employees involved in R&D activities 

Qualifying Activities by Industry 

Manufacturing
Activities may include improving manufacturing processes or product manufacturability, building experimental models or sample units, and testing new production methods. 

Software
Activities may include developing or improving software, assessing technical feasibility, and testing experimental software or other technical solutions. 

Engineering and Product Development
Activities may include creating engineering designs, architecture, models, or prototypes and using CAD, 3D modeling, or similar technical design tools to evaluate alternatives. 

Qualifying Expenditures 

Qualified research expenses, or QREs, are the costs that may be included in calculating the R&D tax credit. Under IRC Section 41(b) and the related Treasury regulations, QREs generally fall into the following categories: 

• Wages: Box 1 W-2 for employees who directly perform, supervise, or support qualifying research activities. 

• Supplies: Materials used or consumed during the development, experimentation, or testing process. 

• Computer Time-Sharing: Cloud computing or hosting costs related to development and testing work. 

• Contract Research: Costs paid to outside vendors or third parties that assist with qualifying development efforts. 

How to Claim the R&D Tax Credit 

• Identify activities and expenses that meet the requirements of IRC Section 41 and Treas. Reg. 1.41-4. 

• Compile documentation supporting qualified research activities, wages, supplies, contract research, and computer costs. 

• Complete IRS Form 6765 and retain the records described in the IRS Instructions for Form 6765. 

According to Jonathan Tucker, Principal at KBKG, a supportable R&D tax credit claim should connect the technical story and the financial calculation: what uncertainty the company faced, which alternatives it evaluated, who performed the work, and how the related expenses were determined. KBKG recommends building that connection throughout the year rather than reconstructing it only when the return is prepared. 

About KBKG's R&D Tax Credit Team 

KBKG’s R&D Tax Credit experts specialize in identifying qualifying research activities, calculating qualified research expenses, preparing the technical and financial documentation needed to support an R&D tax credit claim, and defending such claims before the IRS or state taxing authority. The team works across software, manufacturing, engineering, life sciences, and other innovation-driven industries, applying current federal and state tax guidance to each company’s projects, expenses, and documentation. 

For businesses evaluating whether they qualify for the R&D tax credit, KBKG provides a project-level review of the four-part test, eligible wages and development costs, payroll tax credit opportunities, and potential prior-year claims. This approach helps companies move beyond a general eligibility estimate and determine which activities and expenses may support a defensible credit. 

Businesses with questions about eligibility or the potential value of their qualifying work can request a free consultation with KBKG’s R&D tax credit specialists. 

Frequently Asked Questions 

Who qualifies for the R&D tax credit?
Businesses that perform qualifying research activities and satisfy the four-part test under IRC Section 41 may qualify for the R&D tax credit. 

What expenses can I include in my R&D tax credit claim?
Qualified research expenses may include wages, supplies, computer time-sharing, and certain contract research costs. 

How do I claim the credit?
Businesses generally claim the credit on IRS Form 6765 and should retain documentation supporting their qualifying activities and expenses.