Frequently Asked Questions

The R&D Tax Credit is a tax incentive, offered on a federal level as well as many individual states, designed to reward companies for investing in the development of innovative technologies and processes. It allows companies to claim a credit based on a percentage of eligble costs, to be used to off set state and federal tax liabilities. Certain qualified small businesses may also elect to apply a portion of the federal credit against payroll taxes.

Any taxpayer carrying on a trade or business can potentially claim the R&D Tax Credit if qualifying activities are being performed and associated qualifying costs have been incurred.

Business activities are assessed according to the "Four-Part Test" outlined in Section 41 of the Internal Revenue Code. The test outlines four major requirements which must be met in order for an activity to qualify:​(i) The research must seek to create or improve a business component’s function, performance, reliability, or quality.​(ii) The research must fundamentally rely on principles of the physical or biological sciences, engineering, or computer science.​(iii) There must be uncertainty regarding the capability, method, or appropriate design for achieving the intended result.​(iv) ​​The business must evaluate one or more alternatives through activities such as modeling, simulation, systematic trial and error, prototyping, or testing.​

Eligible costs can include wages paid to employees who perform, directly supervise or directly support qualifying R&D activities, materials and supplies used during development and testing, a proportion of certain third-party research costs, and qualifying computer rental expenses, provided those costs are directly connected to qualifying research activities.

The R&D Tax Credit can generally be used to reduce a company’s federal or state income tax liability, subject to the applicable limitations. Qualified small businesses may also be able to elect to use a portion of the federal credit against certain payroll taxes.

A company does not need to be profitable to claim the R&D Tax Credit. Where there is insufficient current tax liability to utilize the credit, unused credits may generally be carried forward to future years, while certain qualified small businesses may be able to apply a portion of the federal credit against payroll taxes.

Unused federal R&D Tax Credits can generally be carried back one year or carried forward for up to 20 years, allowing businesses to utilize credits in other tax periods where sufficient tax liability exists. State carryforward and carryback provisions vary depending on the jurisdiction.

R&D Tax Credit claims require more than simply identifying eligible costs. A strong claim should clearly connect the company’s technical activities to the relevant tax requirements and be supported by consistent, well-prepared documentation.Working with an R&D specialist can help ensure qualifying activities are identified thoroughly, the credit is calculated correctly, and the supporting evidence is developed to a robust standard. This can improve both the value of the claim and the quality of the substantiation behind it, helping the business present a more defensible position in the event of IRS review.