What is the R&D tax credit?
The federal Credit for Increasing Research Activities (Internal Revenue Code Section 41) was introduced in 1981 to reward US businesses that invest in innovation. Congress made it permanent in 2015, and it remains one of the most valuable incentives available to American businesses.
Unlike a deduction, which only reduces taxable income, a credit reduces your tax bill dollar-for-dollar. Unused credits can be carried forward for up to 20 years, and many states offer their own R&D credits on top of the federal benefit.
It's not just for laboratories
The biggest misconception about the R&D credit is that it only applies to scientists in white coats. In reality, the credit covers everyday technical problem-solving: designing a new product, engineering a custom solution for a client, improving a manufacturing process or writing new software. Many eligible businesses never claim it simply because they don't realize they qualify.
The four-part test
To qualify, an activity must meet all four of the following tests. We evaluate each project, or "business component," against them.
Permitted purpose
The work aims to create a new or improved product, process, software, technique, formula or invention, improving its function, performance, reliability or quality.
Technological in nature
The work relies on principles of engineering, physics, chemistry, biology or computer science.
Elimination of uncertainty
At the outset, you were uncertain about the capability, method or appropriate design needed to achieve the result.
Process of experimentation
You evaluated alternatives through modeling, simulation, prototyping, testing or systematic trial and error.
Activities that don't qualify include market research, advertising, routine quality-control testing, research after commercial production begins, research funded by someone else, and research conducted outside the United States.
Qualifying research expenses
| Expense type | What's included | Amount counted |
|---|---|---|
| Wages | W-2 wages of employees who perform, directly supervise or directly support qualified research, typically the largest component | 100% |
| Supplies | Materials consumed or destroyed in the research process, such as prototype materials and test batches | 100% |
| Contract research | Amounts paid to US contractors and consultants performing qualified research on your behalf | 65% |
| Computer use | Cloud computing and server rental costs used for development and testing | 100% |
Our specialism: custom engineering & manufacturing
We focus on businesses that deliver innovative, custom-designed projects: fabricators, machine builders, engineering firms, design-build contractors and manufacturers who solve a new technical problem for almost every client.
These businesses are often the most under-claimed, because the innovation feels like "just what we do." Every custom tooling design, prototype, first-article build and process improvement can represent qualifying research.
Custom work under client contracts raises specific questions, particularly whether the research is "funded." Generally, you can claim the credit when you bear the financial risk (for example, on fixed-price contracts) and retain substantial rights to the results. We review your contracts to get this right.
Industries we serve
- Manufacturing & fabrication
- Custom machinery & tooling
- Engineering & architecture
- Design-build construction
- Software & SaaS
- Electronics & automation
- Aerospace & defense suppliers
- Automotive & marine
- Food & beverage production
- Plastics & chemicals
- Agriculture & agtech
- Medical devices & life sciences
Start-ups: use the credit against payroll taxes
Pre-profit companies may not owe income tax, but they can still benefit. A qualified small business with less than $5 million in gross receipts, and no gross receipts before the five-year period ending with the current year, can elect to apply up to $500,000 a year of R&D credit against its employer payroll taxes (Social Security and Medicare).
That means real cash-flow benefit starting the quarter after you file, even with no taxable income. The election can be made for up to five years.
How the credit is calculated
There are two main federal methods, and we calculate both to find the better result:
- Alternative Simplified Credit (ASC): generally 14% of qualified research expenses above 50% of your average for the prior three years, or 6% of current-year expenses if you had none in any of those three years. Most businesses use this method.
- Regular credit: 20% of qualified research expenses above a historical base amount. It can produce a larger credit, but requires more historical data.
As a rule of thumb, the net federal benefit often ranges from 6% to 10% of qualifying spend, before any state credits.
Documentation: getting it right
The IRS has significantly increased its focus on R&D claims, and Form 6765 now asks for more detailed information about each business component. A defensible claim depends on contemporaneous documentation that ties expenses to specific projects and shows the four-part test was met.
We handle this for you through structured technical interviews with your team, project-by-project write-ups, wage allocation, and a complete supporting study, so your claim is ready for review.
Missed prior years?
In many cases, credits can be claimed for open prior tax years by filing amended returns. We'll review whether earlier years offer additional opportunities.
Our R&D credit process
Eligibility review
A free call to understand your activities and identify qualifying projects.
Benefit estimate
A projection of the likely federal and state credit before you commit.
Technical interviews
Short, focused conversations with your engineers and project leads.
Cost analysis
Wages, supplies and contract costs mapped to each project.
Credit study
A full written study and Form 6765 support delivered to your CPA.
Ongoing support
Year-on-year claims and support if the IRS has questions.