Innovation drives business growth, but costs can add up. The R&D Tax Credit is a government tax break that rewards companies for investing in innovation. It reduces a business’s taxes dollar-for-dollar when they develop new products, processes, or software. In simple terms, the R&D Tax Credit helps your company get a portion of the money you've spent on innovation back. This tax break has helped companies of all sizes take on new challenges and grow.
TL;DR ... Interested in finding out how much credit you're eligible for?
Get a free estimate with our R&D Tax Credit Calculator:
Who Qualifies for the R&D Tax Credit?
Many businesses qualify for the R&D Tax Credit without realizing it. You don’t need a lab full of scientists to benefit. If your company works on new products or services or improving existing ones, you likely qualify. The credit is open to companies in any industry—not just for tech or bio.
Here are a few qualifying questions:
General Eligibility Questions
Does your business develop or improve products, processes, software, or formulas?
Do you conduct research in the United States?
Are you working to eliminate technical uncertainty in your development efforts?
Does your research involve engineering, physics, biology, chemistry, or computer science?
Are you testing, prototyping, or experimenting with different approaches to improve your product or process?
Financial & Structural Questions
Do you pay wages to employees who conduct or support R&D activities?
Do you incur costs for materials, supplies, or third-party contractors to perform research?
Do your annual gross receipts for the past three years average less than $50 million?
Do you have gross receipts of less than $5 million this year with no revenue in the past five years?
Process & Documentation Questions
Are you keeping records of your research activities, including test results, project notes, and employee timesheets?
Do you follow a structured process of experimentation to solve technical problems?
Are you claiming or have you previously claimed the R&D Tax Credit?
If your business answers "yes" to most of these, you may qualify for the R&D Tax Credit.
R&D isn’t limited to high-tech labs. Here some examples that can apply across different industries:
Technology: A startup designs a new mobile app with a unique algorithm. The time the developers spend coding, testing, and debugging qualifies for the credit.
Manufacturing: A company tries a new assembly line process to reduce waste. They build prototypes and adjust machine settings. The engineers’ wages and prototype material costs qualify for the credit.
Food & Beverage: A CPG company/bakery creates a new gluten-free recipe. The owner tests different ingredient combinations for the right texture and taste. The ingredients in test batches qualify as R&D costs. The staff’s time for experiments also counts.
Agriculture: A farm tests drought-resistant crops. They try different methods to increase yields. The seed, fertilizer, and labor costs for these trials qualify for the credit.
These examples show the R&D tax credit is flexible. It can apply to many types of projects.
How Much Can You Save?
The R&D Tax Credit can lead to big savings. The exact amount varies, but many companies get back 5% to 10% of their R&D costs. For example, if you spend $100,000 on R&D, you might get $5,000 to $10,000 back. That’s money you can reinvest in your business.
Even if your company isn’t making a profit yet, you can still benefit. Use the R&D credit to offset payroll taxes instead of income taxes. New businesses can apply up to $500,000 of R&D credits per year against payroll taxes (Qualified small business payroll tax credit for increasing research activities | Internal Revenue Service). This gives you cash back even before you turn a profit.
Qualifying Expenses
Many costs can qualify for the R&D Tax Credit. Here are the main types of costs that count:
Employee wages: The tax credit can subsidize the salaries of employees working on R&D projects (like engineers or developers).
Supplies and materials: Materials used in development, such as prototype supplies, lab equipment, or testing components.
Contract research: Fees paid to outside consultants or contractors for R&D work.
What doesn’t qualify for R&D tax credits? General business costs like marketing, sales, or routine product testing. The credit focuses on expenses tied to actual research and development.
How to Claim the Credit
Claiming the R&D Tax Credit involves a few steps. You can do this with help from a professional with experience in non-dilutive tax credits.
Identify R&D projects and costs. List the projects you worked on and note the related costs (wages, materials, etc.).
Document your work. Keep notes, design drafts, and test results to show what you tried and how you solved problems.
Calculate the credit. Add up your qualifying costs and figure out the credit (often around 7% to 10% of those costs). You can use the IRS’s simplified credit method or try our free calculator to get an estimate.
Fill out the forms. Complete the IRS form for the R&D credit and include it with your tax return. If you’re a startup using the payroll tax option, also submit the payroll tax credit form.
Claim the credit. Apply the credit to reduce your tax bill. If it’s larger than your tax due, carry the extra forward to future years. Startups can use the credit for a payroll tax refund.
Myths Debunked:
Some misconceptions stop businesses from claiming the R&D credit. Let’s clear up a few:
“Our work isn’t groundbreaking enough.” You don’t need a world-changing invention to qualify. Even minor improvements can count as R&D if they involve technical challenges.
“Only large entities are eligible for this credit.” Companies of all sizes and industries can qualify. Even startups with no income tax can get a benefit (for example, a payroll tax refund).
“We tried and failed, so it doesn’t count.” Even failed projects qualify because the credit rewards the attempt to innovate, not just success.
Recent Tax Law Changes
Tax laws change over time, so stay updated on R&D credit rules. Here are two recent changes to note:
Bigger benefits for startups: New laws expanded the R&D credit for small businesses. Starting in 2023, companies not yet paying income tax can use up to $500,000 of their R&D credits each year to offset payroll taxes (Qualified small business payroll tax credit for increasing research activities | Internal Revenue Service).
Changes to R&D deductions: Beginning in 2022, businesses must spread R&D costs over five years for US projects (15 years for research done abroad) (Section 174: Understanding Research & Development expenditures - Thomson Reuters Institute). You can’t deduct all research costs in the same year anymore, but this does not reduce the R&D tax credit you can claim.
Expert Tips to Save More
Consider these tips to get the most out of the R&D Tax Credit:
Plan and document thoroughly: Track R&D projects and expenses from the start. Save emails, design drafts, test results, and notes from your R&D process. No detail should get overlooked, and you’ll have proof of your work.
Consult a specialist if needed: R&D tax rules can be complex. Tax professionals or non-dilutive fund specialists like Panna that focus on R&D credits can help. They make sure you’re not missing out and that your claims are correct.
The R&D Tax Credit can fuel your business’s growth. Many companies leave this money on the table. They assume they won’t qualify or think it’s too hard to claim. In reality, the credit is within reach and worth it.
Now is the time to act.
Don’t miss this chance to cut taxes and reinvest in your business. Look at your projects over the past year. Did you attempt something new or improved? If so, let's chat!