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Last week, I took a break from my usual writing routine to attend a tax conference. (Yes, that counts as a vacation in this profession.) One of the most insightful sessions covered the Research & Development (R&D) tax credit — a benefit many assume is reserved for large corporations with high-tech labs and billion-dollar budgets.
Spoiler: It’s not.
In fact, I was surprised to learn that I qualify — not through my work as a tax professional, but through the software development side of my business. If you're wearing multiple hats in your business, it’s worth taking a second look at whether this credit could apply to you too.
What Exactly Is the R&D Credit?
The R&D credit is a general business tax credit available to companies that invest in qualified research and development activities to promote innovation and technical advancement. It’s defined under Internal Revenue Code Section 41, and it’s far more accessible than many business owners realize.
To qualify, your research activities must involve all four of the following:
- Use of the hard sciences, such as engineering, mathematics, life sciences, or computer science
- A business component, such as a new or improved product, process, technique, formula, or software
- Technical uncertainty — meaning there was a challenge or unknown in how to achieve the intended result
- A process of experimentation, including trial and error, modeling, testing, or evaluation
If your work checks all four boxes, you may be eligible.
Common Qualifying Research Expenditures (QREs)
1. Wages
Salaries and wages paid to employees who:
- Perform, supervise, or directly support qualified research activities
- Include engineers, developers, technicians, and project leads
2. Supplies
Non-depreciable tangible property used during qualified research, such as:
- Prototype materials
- Testing supplies
- Components consumed in the experimental process
(Note: Capital equipment and depreciable assets do not qualify.)
3. Contract Research
Amounts paid to third parties for conducting qualified research on your behalf, including:
- Independent software developers
- Engineering consultants
- Lab testing services
(Generally, only 65% of contract research expenses qualify, and the business must retain rights to the work performed.)
4. Cloud Computing Costs
For software-related R&D, this may include:
- Hosting, storage, and server usage during development or testing phases
- Providers like AWS or Google Cloud, if directly linked to experimentation
5. Software Development
Development costs related to:
- Writing and testing new code
- Designing or optimizing algorithms
- Debugging or enhancing performance
(Internal-use software must meet a higher threshold of innovation to qualify.)
Expenses That Typically Don’t Qualify
- Routine bug fixes or maintenance
- Market research or user surveys
- Research conducted outside the U.S.
- Research fully funded by a third party or grant
What’s the Potential Value?
The R&D credit offers meaningful tax savings:
- 6% to 8% of qualified R&D expenses can be applied directly against your federal income tax liability
- You can amend tax returns for up to three prior years to claim missed credits
- Unused credits may be carried forward for up to 20 years
For startups, the credit can be even more impactful. Eligible businesses may apply the R&D credit against payroll taxes, up to:
- $250,000 per year, for businesses with under $5 million in current gross receipts
- A maximum of five years of eligibility, totaling up to $1.25 million in payroll tax offsets
Final Thought
The R&D credit isn't just for companies with lab coats and clean rooms. It’s for creators, builders, problem-solvers, and innovators — the entrepreneurs improving products, writing code, or streamlining internal systems.
So before dismissing it as “not for me,” consider whether your business is doing something technically new or improved. You may be leaving valuable tax credits unclaimed.
