In this guide
What is the R&D tax credit?
The R&D tax credit is a federal credit under Section 41 of the tax code for companies that spend money resolving technical uncertainty in their products, processes, software, or formulas. It has been part of the tax code since 1981 and is available to businesses of every size.
Because it is a credit, it reduces tax owed dollar for dollar. A $100,000 credit can offset up to $100,000 of income tax, while a $100,000 deduction at a 37% rate is worth $37,000. Nearly 40 states offer their own R&D credit, which can be claimed alongside the federal credit.
Our R&D tax credit page covers how we run studies and what we deliver.
Who qualifies for the R&D tax credit?
Any company whose work passes the four-part test in Section 41(d), and is not excluded (for example, funded research, research after commercial production, or foreign research), can qualify. The credit does not require a lab, an R&D department, or a patent. Most companies that assume they do not qualify are looking only at the first part of the test and stopping there.
- 01
Permitted purpose
The work aims to create or improve how a product, process, software, technique, or formula functions, performs, or holds up.
- 02
Technological in nature
It relies on engineering, physics, chemistry, biology, or computer science.
- 03
Elimination of uncertainty
At the start, the capability, the method, or the right design was unknown.
- 04
Process of experimentation
Alternatives were evaluated through modeling, simulation, prototyping, or systematic trial and error.
What counts as a qualified research expense?
Four kinds of spending carry almost every claim. Wages are usually the largest by a wide margin.
Wages
W-2 wages for time employees spent performing, directly supervising, or directly supporting the qualifying work.
Supplies
Materials used up while building and testing, including prototypes and trial runs that failed.
Contract research
65% of what you paid outside firms for qualified research done on your behalf, under an agreement made before the work, when you pay whether or not the work succeeds and have a right to use the results.
Cloud computing
Amounts paid for computing time used in the qualifying research, such as development and test environments.
Land, buildings, equipment you depreciate, market research, and routine quality testing do not count.
How is the R&D tax credit calculated?
There are two federal methods, and a company may use either one. We run both against your numbers and use the one that pays more. In practice, the federal credit typically works out to 6 to 10% of qualified research expenses, so $1,000,000 of qualified spending usually produces about $60,000 to $100,000 of federal credit.
| Method | How it works | Usually best for |
|---|---|---|
| Regular credit | 20% of qualified research expenses above a base amount set by the company's historical research spending relative to its gross receipts. | Companies with a long, steady record of research and good historical data. |
| Alternative simplified credit | 14% of qualified research expenses above half of the average for the prior three years. When a company had no qualified research expenses in any one of those three years, the rate is 6% of current-year expenses. | Newer or growing programs, and companies whose older records are thin. |
Companies also reduce either their research deduction or the credit itself so the same dollars are not counted twice. We model that choice as part of every study.
Source: IRS Instructions for Form 6765
Can a startup with no income tax use the R&D credit?
Yes. A qualified small business can apply up to $500,000 of the credit each year against its payroll taxes instead of income tax. A qualified small business has less than $5,000,000 in gross receipts for the year and no gross receipts in any year before the five-year period ending with that year.
Credit a company cannot use right away can be carried back one year and forward up to 20 years, so its value is not lost immediately.
How does Section 174A change the R&D credit?
Section 174A lets companies deduct domestic research costs in the year they are paid or incurred again, for tax years beginning after December 31, 2024. From 2022 through 2024, those costs had to be amortized over five years, which raised cash taxes and led some companies to stop claiming the credit.
Costs from 2022 through 2024 that were still being amortized can be deducted in 2025, or split over 2025 and 2026. The separate election that let smaller businesses apply the new rules back to 2022 through 2024 closed on July 6, 2026. Foreign research costs are still amortized over 15 years.
Source: IRS Rev. Proc. 2025-28
Can you claim the R&D credit for prior years?
Usually, yes. Open prior years, typically the last three, can be claimed on an amended return, or for most partnerships an administrative adjustment request. The credit produces a refund to the extent it offsets tax paid for that year. Refund claims must include specific information the IRS requires, including the business components the research relates to, and we prepare that as part of the study.
For tax years that begin after December 31, 2025, Section G of Form 6765 requires business component detail unless the company is a qualified small business taking the payroll election, or reports $1,500,000 or less of qualified research expenses (measured across its controlled group) and $50,000,000 or less of average annual gross receipts on an original return. Documentation organized by project matters more than it used to.
See our Law Updates for the latest changes and dates.
Do states offer R&D tax credits too?
Yes. Nearly 40 states offer their own R&D credit, and most can be claimed alongside the federal credit. The rules differ widely: some are refundable, some require approval before the work starts, and some count only research performed in that state.
Our state R&D credit lookup compares the programs we have profiled, and we confirm the current rules for every state on your return as part of a study.
Which industries claim the R&D tax credit?
Qualifying work shows up in almost every industry. The pattern is the same each time: the work was billed to a client or booked as production, so nobody thought of it as research. Our industry pages go deeper:
How does an R&D tax credit study work?
Four steps, and almost none of it lands on your team.
- 01
Discovery call
Thirty minutes to look at what you build and what you spend, and size the likely credit.
- 02
Technical interviews
Our engineers talk with your technical staff and document the uncertainty each project resolved.
- 03
Credit calculation
Both federal methods are run, the better one is applied, and the documentation is built around it.
- 04
Filing support
A package your CPA can file from, and support if the IRS ever asks questions.
Common questions about the R&D tax credit
Do you need a lab or an R&D department to claim the R&D credit?
No. The credit follows the work, not the job title or the room. Engineers, developers, formulators, and production staff who resolve technical uncertainty can all generate qualified wages.
How much is the federal R&D credit worth?
The federal credit typically works out to 6 to 10% of qualified research expenses. A company with $1,000,000 of qualified spending usually earns about $60,000 to $100,000 of federal credit, before any state credit.
Does work that failed still count toward the R&D credit?
It can, when it was part of a process of experimentation. Failed attempts are often the strongest evidence that a process of experimentation happened. The credit rewards the effort to resolve uncertainty, not only the successes.
Can a company claim the R&D credit if it has never claimed it before?
Usually. Open prior years, typically the last three, can be claimed on an amended return, or for most partnerships an administrative adjustment request. The credit produces a refund to the extent it offsets tax paid for that year. The current year is claimed on the original return.
Does claiming the R&D credit increase audit risk?
A well-documented claim is built to hold up if the IRS asks. Our studies are written to the evidence standard the IRS applies, and we support your CPA if a credit we prepared is ever examined.