Missing Out on R&D Tax Credits? Here’s How to Claim Your Share

Did you know only 3 in 10 eligible businesses claim the R&D tax credit? Almost every large company uses this benefit. Eligible businesses leave millions in tax savings unclaimed across America. Companies can get 13 cents back for every dollar they spend on qualified research. The federal government sets aside $12 billion each year for R&D credits.

Small and mid-sized businesses often find R&D tax credit claims challenging. The good news is these credits are now more available than ever before. The Protecting Americans from Tax Hikes (PATH) Act of 2015 made two important changes. It made the R&D tax credit permanent and opened doors for smaller businesses. Companies with less than $5 million in gross receipts can claim up to $250,000 yearly against their payroll taxes.

This piece will show you the exact steps to check your eligibility, spot qualifying expenses, and file a winning R&D tax credit claim. You’ll find practical strategies to help your business get its share of these valuable tax benefits, whether you’re a first-time applicant or want to boost your existing claims.

Understanding R&D Tax Credit Eligibility Requirements

U.S. companies leave millions in tax savings on the table by wrongly thinking they don’t qualify for R&D tax credits. Only 14,000 companies claim these credits each year, which represents nowhere near the total eligible businesses – just 33% actually submit claims. Your business might qualify too, but you need to know the IRS’s specific criteria.

The Four-Part Test for Qualifying Activities

The IRS uses a simple four-part test to assess research activities:

1. Permitted Purpose: Your work should improve a business component’s functionality, quality, reliability, or performance. This applies to products, processes, software, techniques, formulas, or inventions.
2. Technological in Nature: Your research must rely on physical or biological sciences, engineering, or computer science principles.
3. Elimination of Uncertainty: You should show how your company tried to solve uncertainties about developing or improving a business component.
4. Process of Experimentation: Your team must test different options through simulation, modeling, systematic trial and error, or similar methods.

Industries That Can Benefit from R&D Credits

R&D credits aren’t just for people wearing lab coats. The IRS doesn’t exclude any specific industry from claiming these credits. These credits benefit many sectors beyond tech:

• Construction
• Manufacturing
• Agriculture
• Food and beverage
• Architecture and engineering
• Software development
• Chemical and formula development

Common Misconceptions About Who Qualifies

People often think R&D credits belong only to big corporations or tech companies. Notwithstanding that, recent tax code changes expanded R&D definition from pure laboratory science to real-life applications.

Companies mistakenly believe they must have:

• A dedicated research department
• Scientists or engineers on payroll
• Successful project outcomes
• Patented breakthroughs

The qualification rules are broader than most think. You might qualify even with third-party contractors doing your research. On top of that, failed projects can qualify when they meet the four-part test requirements.

Identifying Qualified Research Expenses (QREs)

Your R&D tax credits depend on how well you identify your Qualified Research Expenses (QREs). The IRS recognizes three main categories of expenses that count toward your credit calculation.

Eligible Wage Expenses: Who Counts and How Much

Most companies see their largest QREs coming from wage expenses. These include taxable W-2 wages, bonuses, and stock options paid to employees who perform “qualified services”. The qualified services fall into three specific categories:

1. Directly engaging in qualified research – Employees who actively conduct experiments or development work
2. Direct supervision – First-line managers who oversee research activities (higher-level management usually doesn’t qualify)
3. Direct support – Staff who help with the research process

The IRS has an “80% rule” – if your employee spends at least 80% of their time on qualified research, you can claim 100% of their wages as QREs. For others, you can only claim the percentage of time they spend on qualified activities.

Supply Costs That Qualify for the Credit

Supply expenses cover tangible materials you use in your research. These supplies must:

• Be used in the R&D process
• Get used up during research
• Be used only for R&D activities

The IRS doesn’t include land, land improvements, depreciable property, or general office supplies. You’ll often see qualifying supplies like laboratory materials, prototyping components, and testing materials.

Contract Research and Cloud Computing Expenses

Third-party research payments count as contract research expenses. The IRS lets you count 65% of these payments as QREs. You need to set up the contract before research starts and keep the rights to research results.

Cloud computing costs have become a big part of QREs. Your cloud expenses qualify when:

• Someone else owns and runs the computers
• The computers stay off your premises
• Your company isn’t the main user

The IRS only accepts cloud services you use for R&D – think pre-production and testing environments rather than regular business software.

How to Submit an R&D Tax Credit Claim: Step-by-Step Process

Submitting an R&D tax credit claim needs careful attention to detail and proper documentation. The process might look challenging at first, but a clear understanding of each step makes the experience from identification to submission much easier.

Gathering Essential Documentation

The IRS makes taxpayers responsible for proving their R&D credit claims. So, having complete documentation becomes vital to support your claim. Your records should include:

• Payroll records for employees involved in R&D activities
• Expense receipts and accounts for supplies related to research
• Contracts and invoices from third-party research partners
• Project notes, blueprints, patents, designs, and prototypes
• Meeting notes that show research discussions and progress

These documents should clearly show your qualified research spending and prove they meet the four-part test criteria.

Completing Form 6765 Correctly

Form 6765 serves as the official document to calculate and claim R&D tax credits. The 2025 version has seven distinct sections (A-G):

1. Sections A/B: Calculate credits using Regular or Alternative Simplified method
2. Section C: Points to other forms based on business structure
3. Section D: Lets qualified small businesses claim payroll tax offset (up to $500,000)
4. Section E: Needs disclosure of business components generating QREs
5. Section F: Lists QREs including wages and contract research
6. Section G: Shows detailed business component information (optional until January 1, 2025)

Choosing Between Regular and Alternative Simplified Credit Methods

Regular research credit equals 20% of qualifying expenditures above a base amount. The Alternative Simplified Credit (ASC) equals 14% of current year QREs exceeding 50% of the average QREs from three previous years.

Experts suggest calculating your credit using both methods and picking the one that gives you more benefits.

Filing Deadlines and Extension Options

You must file R&D tax credit claims with your tax return. Corporate deadlines typically are:

• Original filing deadline: April 15th annually
• Extended deadline (with timely filed extension): October 15th
• Payroll tax credit election must happen on original timely filed return

The IRS now requires identification of all business components, research activities, and total qualified expenses as of June 18, 2024. Starting January 10, 2025, taxpayers will get a 45-day period to fix deficient claims after notification.

Maximizing Your R&D Tax Credit Claim Value

Simple qualification and filing procedures aren’t enough. Smart approaches can increase your R&D tax credit return by a lot. Businesses usually recover 5-10 cents for every qualified dollar spent with good planning.

Strategies for Proper Expense Allocation

Accurate expense tracking serves as the foundation to maximize your claim. Project accounting helps monitor costs of specific research initiatives effectively. Your general ledger accounts should separate qualified research expenses from general business costs clearly. Here’s what you need while documenting QREs:

• Break out qualified research expenses by project (required starting 2024)
• Track wages of company officers involved in research separately
• Keep clear records that show how supplies connect directly to qualified services

Contract research expenses need agreements that start before research begins. These agreements must specify research performed on your behalf and state you bear financial risk whatever the outcome.

State-Level R&D Credits: Don’t Leave Money on the Table

The landscape of R&D credits is promising. In fact, 37 states run their own R&D tax credit programs as of 2025. These state-level credits give more generous benefits than federal programs usually.

To cite an instance, Georgia’s credits can offset up to 50% of tax liability and apply remaining amounts against payroll taxes. Delaware takes it further by refunding any difference between your in-state tax liability and the total R&D credit.

Most state credits follow federal guidelines but may have unique features. Texas gives businesses a choice between sales tax exemptions on research purchases and franchise tax credits based on research spending.

Startup Payroll Tax Credit Option: Up to $500,000 in Benefits

The PATH Act created a great chance for startups. Qualified small businesses can now use R&D credits against payroll tax liabilities. This provides direct cash when companies need it most.

The Inflation Reduction Act doubled this benefit from $250,000 to $500,000 yearly starting January 2023. Your business qualifies if you:

• Have less than $5 million in gross receipts for the credit year
• Don’t have gross receipts older than five years

The credit applies to your portion of Social Security tax first (up to $250,000 per quarter), then Medicare tax. Any remaining amounts carry forward.

Conclusion

R&D tax credits are powerful tools that many businesses overlook. These credits can return up to 13 cents for every qualified research dollar spent. Many companies miss out because they think the process is too complex or they don’t qualify.

The rules have changed substantially since 2015. Businesses can now benefit from permanent R&D credits, broader eligibility criteria, and easier claiming processes. State programs offer extra advantages, and startups can claim up to $500,000 against payroll taxes.

Companies succeed with R&D tax credits through three essential elements:

• Understanding qualification requirements through the four-part test
• Properly identifying and documenting qualified research expenses
• Following correct filing procedures with complete, accurate documentation

These credits do more than just save taxes. They help drive innovation and business growth while strengthening America’s position in global markets. Companies should review their activities often to capture all eligible R&D expenses and maximize their claims.

R&D activities happen in many industries – from manufacturing to software development. Even small improvements in products, processes, or services could qualify for these valuable credits. Businesses of all sizes should consider exploring these opportunities.