Research & Development (R&D) Tax Credit

R&D tax credits are dollar-for-dollar reductions in tax liability for companies that conduct qualifying research activities. They’re designed to incentivize innovation and technological advancement.

While many industries can qualify, common ones include manufacturing, software development, engineering, aerospace, pharmaceuticals, food science, and agriculture.

Qualifying activities must meet a four-part test:

• Be technological in nature
• Involve the elimination of uncertainty
• Involve a process of experimentation
• Have a qualified purpose (to create new or improved business components)

Qualified research expenses typically include:

• Wages for employees conducting research
• Supplies used in the research process
• Contract research expenses (65% of payments to contractors)
• Rental or lease costs of computers used in research activities

You can typically claim R&D tax credits for the current tax year plus the previous three tax years.

Yes, qualifying startups can use the credit to offset up to $250,000 in payroll taxes annually for up to five years.

The credit is generally calculated as a percentage of qualified research expenses over a base amount, which is determined by your company’s historical research activities.

You should maintain contemporaneous documentation of your research activities, including project records, payroll records, general ledgers, and any other documents that support your qualified research expenses.

Calculating the R&D (Research and Development) tax credit involves identifying qualified research expenses and applying IRS-approved formulas to determine the credit amount. The credit is available to businesses that develop or improve products, processes, software, or technologies in the U.S.

The most common method is the Regular Credit Calculation , which equals 20% of QREs above a base amount, typically based on historical R&D spending and gross receipts. Alternatively, the Alternative Simplified Credit method offers 14% of QREs exceeding 50% of the average QREs over the prior three years. Startups with limited historical data often choose the ASC method for its flexibility.

Qualified expenses usually include wages for technical staff, supplies used in R&D activities, and a portion of contract research costs.

At CSSI, our experts help businesses identify eligible activities, calculate accurate credit amounts, and prepare the necessary documentation for IRS compliance. Proper calculation not only reduces tax liability but also frees up capital for reinvestment into innovation and growth.

The R&D tax credit is a dollar-for-dollar federal tax incentive that rewards businesses for investing in innovation and technical development within the United States. It applies to companies of all sizes and across industries that engage in qualified research activities such as developing new products, improving existing processes, or testing prototypes.

The credit is calculated based on qualified research expenses (QREs), which typically include employee wages, materials used in development, and contractor fees related to research efforts. Once calculated, the credit can be applied directly against your income tax liability. In some cases, small businesses and startups may also apply the credit toward payroll taxes.

To claim the credit, companies must document their research activities, identify eligible expenses, and file IRS Form 6765 with their tax return. Working with a knowledgeable provider ensures you capture the full value of the credit while staying compliant.

CSSI assists businesses in identifying qualifying R&D work, calculating eligible expenses, and preparing proper documentation. For many companies, the R&D tax credit becomes a powerful tool to offset taxes and reinvest savings back into growth and innovation.