R&D Tax Credits

How much is the R&D tax credit worth?

The R&D tax credit is typically worth between 5% and 14% of qualified research expenses, depending on the calculation method used and the company’s historical level of R&D investment. The final value is driven by incremental increases in qualifying activity and how expenses are allocated under IRS rules.

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Expanded Answer

How is the value of the R&D tax credit determined?

The value of the R&D tax credit is determined based on a company’s qualified research expenses (QREs), which generally include employee wages, certain supplies used in development, and a portion of payments made to U.S.-based contractors performing qualified research. These expenses must be directly tied to activities that meet the IRS definition of qualified research under Internal Revenue Code Section 41.

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The credit is calculated using either the Regular Credit (RC) or the Alternative Simplified Credit (ASC). Under the ASC method, the credit is equal to 14% of QREs that exceed 50% of the average QREs from the prior three years, rewarding companies that increase their R&D investment over time. While the exact percentage varies, most companies realize a benefit between 5% and 10% of total qualified expenses.
Source: https://www.irs.gov/businesses/research-credit

What Qualifies

Activities that commonly qualify

Developing new software features or platform capabilities

Improving performance, scalability, reliability, or security

Building internal tools or technical workflows that required experimentation

Testing different technical approaches to solve engineering challenges

What Does Not Qualify

Work that usually does not qualify

Routine bug fixes with no technical uncertainty

Visual-only updates or minor design changes

Marketing, sales, and customer support work

General maintenance that did not require experimentation

Work already solved through an off-the-shelf implementation

Example Case Study

Example of how the R&D tax credit is calculated

A software company incurs $1.2 million in qualified research expenses, including engineering wages and contractor support. Its average QREs over the prior three years total $800,000, which establishes a baseline for the ASC calculation.

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Because the company increased its development investment, a portion of its current-year expenses qualifies for the credit. This results in a credit that directly reduces its federal tax liability, demonstrating how incremental R&D spend translates into measurable tax savings.

Quick takeaway

If your team had to work through technical uncertainty, there is a good chance the work deserves a closer look.

Common Industry Examples

Identifying and tracking qualified research expenses (QREs) across payroll, contractors, and supplies

Calculating historical QRE averages to determine eligibility under the ASC method

Allocating employee wages to specific qualified development activities

Applying IRS rules to include eligible contractor costs and exclude non-qualified expenses

Reviewing prior-year data to optimize credit calculation methodology

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Curious if you are missing out on credits?

Start with a quick eligibility check. If it looks promising, we move to a light info request and one technical interview.

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