Not Sure You Can Claim the R&D Tax Credit? Think Again

Many businesses miss out on valuable R&D tax credits because they believe their activities don't qualify. If your company develops new products, improves existing processes, or tackles technical challenges, you could be eligible for significant tax savings.

Understanding the R&D Tax Credit

The Research and Development (R&D) tax credit is a federal incentive that provides cash benefits for companies conducting qualified research activities within the United States. This dollar-for-dollar federal credit can be claimed yearly and used to offset tax liability.

Starting in 2025, detailed project-level reporting is mandatory for businesses with over $1.5 million in Qualified Research Expenses (QREs) or $50 million in gross receipts. The IRS has significantly updated reporting requirements, making proper documentation more critical than ever.

The Four-Part Test

To qualify for an R&D tax credit, activities must meet all four criteria:

1. Permitted Purpose: Develop new or improved functionality, performance, reliability, or quality
2. Technological in Nature: Rely on principles of engineering, computer science, or physical science
3. Elimination of Uncertainty: Face uncertainty concerning development or improvement
4. Process of Experimentation: Evaluate alternatives to eliminate that uncertainty

Common Qualifying Activities

You don't need to be developing groundbreaking innovations to qualify. Software development can qualify when it's new to your company, even if it's not new to the world. Your efforts don't have to succeed, and incremental improvements are eligible.

Many businesses are surprised their routine activities qualify:

• Creating automated processes or custom software
• Specialized technologies, e.g., image or signal processing, AI, speech recognition
• Engineering new products or enhancing existing ones
• Testing new materials or formulations
• Developing more efficient manufacturing processes
• Construction and engineering projects with technical challenges

Navigating New Compliance Requirements

The IRS, through revised Form 6765, now requires more detailed reporting when you file your taxes. You’ll need to document project descriptions, timelines, employee time allocations, expenditures, and technical challenge narratives.

Working with experienced R&D tax credit professionals can help avoid an audit and sustain your claim. 

Recent Industry Trends

Software companies lead in R&D tax credit claims. Developer salaries alone can generate substantial tax savings. For technology companies, this often translates to credits worth hundreds of thousands of dollars annually.

Maximizing Your Benefits

To capture all available credits:

• Document projects, track time, and expenditures
• Look back up to three tax years
• Consider state R&D incentives
• Begin compiling required information now for mandatory 2025 reporting

The Bottom Line

If your business invests in developing or improving products, processes, or software, you likely qualify for the R&D tax credit. With proper guidance and documentation, these credits provide substantial cash flow benefits to reinvest in growth and innovation.

Evaluate your activities against the qualification criteria and consider working with R&D tax credit specialists who can help navigate the complexities while ensuring full compliance with evolving IRS requirements.