R&D Tax Credits — United States
The federal R&D credit, substantiated properly
The federal Research & Experimentation tax credit under Internal Revenue Code §41 rewards companies for qualifying research activity, claimed via Form 6765. It is one of the more consistently under-claimed and under-documented credits available to US businesses — not because the activity isn't happening, but because the technical narrative substantiating it is usually written by someone who didn't do the research.
Assess your eligibilityWhat the federal R&D credit is
The credit is authorized under IRC §41 and claimed by attaching Form 6765 to your federal income tax return. It exists to incentivize US-based research and experimentation, and applies to far more activity than most companies assume — it is not limited to laboratory science.
[verify: current federal credit calculation method (regular credit vs. Alternative Simplified Credit) and current rates]
The four-part test
To qualify, an activity generally has to satisfy all four of the following — this is the core eligibility filter the IRS applies:
01
Permitted purpose
The activity aims to create or improve the function, performance, reliability, or quality of a product, process, software, technique, formula, or invention.
02
Technological in nature
The activity fundamentally relies on principles of physical science, biological science, computer science, or engineering.
03
Elimination of uncertainty
At the outset, there is uncertainty about the capability, method, or appropriate design for achieving the intended result.
04
Process of experimentation
The work involves evaluating one or more alternatives through a systematic process — modeling, simulation, systematic trial and error, or other methods.
Qualified research expenses (QREs)
Expenditure that can support a claim generally falls into four categories:
Wages
Compensation for employees directly performing, supervising, or supporting qualified research.
Supplies
Tangible property used and consumed in the conduct of qualified research (excluding capital items and land).
Contract research
Amounts paid to third parties to perform qualified research on the company's behalf, subject to specific limitations.
Cloud / computer rental
Costs of leased computer time and cloud infrastructure used directly in qualified research.
The payroll tax offset
Qualified small businesses — broadly, companies with limited gross receipts history and revenue below a statutory threshold — can elect to apply some or all of the credit against payroll tax liability rather than income tax, which matters for pre-revenue and early-revenue companies with no income tax liability to offset.
[verify: current payroll tax offset annual cap and qualified small business eligibility thresholds]
[verify: list of current state-level R&D credit programs that may stack with the federal credit — varies significantly by state]
Common misconceptions
“We don't have a lab, so we don't qualify.”
The credit applies to software development, engineering, product design, and process improvement just as much as laboratory science. A lab is not a requirement.
“The project has to succeed to count.”
Failed experiments, abandoned approaches, and projects that didn't ship can still qualify — the credit rewards the process of experimentation and the uncertainty resolved along the way, not the commercial outcome.
Documentation and audit-defence expectations
A defensible claim depends on contemporaneous documentation connecting specific activities, the technical uncertainty they addressed, and the expenditure attributed to them — not a reconstruction assembled after the fact for the tax return.
This is precisely where a technical narrative written by someone who understands the R&D (rather than one assembled from a generic questionnaire) becomes the difference between a claim that holds up under IRS examination and one that doesn't.
FAQ
Frequently asked questions
- Do we need a dedicated R&D department to claim the credit?
- No. Qualifying activity can happen within product, engineering, or operations teams. What matters is whether the specific activity meets the four-part test, not the org chart it sits in.
- Can pre-revenue startups benefit from the credit?
- Often yes, via the payroll tax offset available to qualified small businesses — this can convert the credit into real cash savings even with no income tax liability. [verify: current qualified small business thresholds]
- What if a project failed or was abandoned?
- Failed or abandoned projects can still qualify. The credit is about the process of experimentation and the uncertainty addressed, not whether the project ultimately shipped or succeeded commercially.
- Does routine software maintenance qualify?
- Generally no. Routine debugging, cosmetic changes, and maintenance of existing functionality typically don't meet the four-part test. New functionality developed under genuine technical uncertainty is a different question, assessed case by case.
- How far back can we claim?
- [verify: current amended-return lookback window for claiming the federal credit on prior tax years]
- Can we claim both a federal and a state R&D credit?
- In many cases, yes — a number of states offer their own R&D credit programs that can stack with the federal credit. [verify: which states currently offer stacking R&D credit programs and their specific rules]
Sources
This information is general in nature and does not constitute tax advice. R&D tax incentive rules change and eligibility depends on individual circumstances. Speak to us or a qualified tax adviser before acting.
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