The R&D Tax Credit is a government incentive designed to encourage companies to invest in research and development. It allows eligible businesses to claim a credit against their federal tax liability for qualified R&D expenditures, effectively reducing the cost of innovation.

Any business that conducts research aimed at developing new or improved products, processes, or software may qualify. The credit is available to companies of all sizes and across various industries, as long as they meet the IRS criteria for qualified research activities.

Research and Development (R&D) tax credits reward businesses for investing in innovation by allowing them to offset eligible expenses. While specific qualifications may vary by country, the IRS (U.S.) and similar tax authorities worldwide generally define qualified research expenses (QREs) as costs related to developing new or improved products, processes, or technologies. To qualify, activities must meet the Four-Part Test, ensuring they involve technological uncertainty, a process of experimentation, and technological principles. Here’s a breakdown of the key R&D expenses that can be claimed:

1. Employee Wages & Salaries

Companies can claim a percentage of wages paid to employees who are directly involved in R&D activities. This includes:

Engineers, developers, and scientists conducting research.

Employees testing prototypes, writing software code, or designing new products.

Supervisors and managers overseeing technical research projects.

Employees documenting and analyzing R&D efforts.💡 Note: General administrative staff not involved in research do not qualify.

2. Contractor & Outsourced R&D Costs

If a company hires third-party consultants, engineers, or developers to perform qualified research, a portion of those expenses can be included.

Must be a U.S.-based contractor (for U.S. tax credit eligibility).The company claiming the credit must bear the financial risk of the project.

Typically, 65% of contract R&D expenses can be included.

3. Supplies & Materials Used in R&D

Any tangible materials consumed or used in the R&D process may be eligible, such as:

Prototype materials.

Testing supplies.

Chemicals and raw materials for experimentation.

Specialized components needed for development.

Excluded: General office supplies, furniture, and capital equipment like computers.

4. Cloud Computing & Software Development Costs

With the rise of AI and software innovation, many companies invest in cloud computing and software tools for R&D.

Eligible expenses may include:

Cloud storage and computing costs (AWS, Google Cloud, Azure) used for development.

Open-source software contributions.

Development and testing of new software or applications.

Note: Routine software maintenance does not qualify—only development for new or improved functionality.

5. R&D Testing & Prototyping Expenses

Companies often test prototypes or experimental designs before finalizing products. Eligible costs may include:

Beta testing expenses.

Developing experimental models.

Running lab tests or field trials.

Tip: Ensure proper documentation of test results to prove R&D eligibility.

6. Patent-Related Legal FeesCertain patent application and attorney fees related to research and development may be claimed. This includes:

Patent filing fees.

Legal costs for writing patent applications.

Costs associated with patent research.

While timelines can vary based on the complexity of your projects and the thoroughness of your documentation, many clients start seeing results within a few months. Our streamlined process is designed to expedite claims while ensuring compliance and accuracy.

We leverage years of experience and deep industry knowledge to meticulously analyze your R&D activities. Our experts work to identify every eligible expense and structure your claim to maximize your savings, all while adhering to IRS guidelines to mitigate audit risks.

Yes! In most cases, if you qualify for the federal R&D tax credit, you may also be eligible for state-level R&D tax credits—but it depends on the state.

Over 30 states offer their own R&D tax credits, each with its own rules, rates, and qualification criteria.

Some states closely follow the federal definition of R&D expenses, making it easier to apply for both credits.

Others have different eligibility requirements or additional incentives, such as refundable or transferable credits.

Key Tip: Even if your company isn’t profitable, some states allow R&D credits to be carried forward or applied against payroll taxes.

Since state tax laws vary, it’s best to check your state’s specific R&D credit program or consult a tax professional to maximize your benefits.

Yes! Startups and small businesses can apply up to $500,000 per year of R&D tax credits against payroll taxes—even if they have no profits. This helps reduce employment tax liability and improve cash flow.

Companies need to provide detailed records of their R&D activities, including:

Employee time tracking for R&D work

Project descriptions showing innovation

Testing and experiment documentation

Financial records of qualifying expenses (wages, supplies, contractor costs)

In most cases, you can amend tax returns and claim R&D tax credits for the past 3 years. Some states allow even longer lookback periods. Unused credits can often be carried forward for up to 20 years to offset future taxes.

Not necessarily. While the IRS does scrutinize improper or overly aggressive claims, businesses that properly document their R&D activities and expenses have nothing to worry about. The key is clear, detailed records—including employee time tracking, project descriptions, and financial documentation—to substantiate the claim. Working with a reputable R&D tax credit provider can also help ensure compliance and reduce audit risks.