R&D Tax Credits

What is the R&D tax credit?

The R&D tax credit (IRC §41) is a federal dollar-for-dollar tax reduction for businesses investing in qualified research and development activities. Unlike deductions, credits reduce your actual tax bill, not just your taxable income.

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Expanded Answer

How does the R&D tax credit work?

The Research & Development (R&D) Tax Credit is a federal incentive that rewards businesses for investing in innovation, specifically for developing or improving products, processes, software, or technologies. Companies can reduce their tax liability dollar for dollar based on qualified research expenses such as employee wages, contractor costs, and certain development-related expenses. Unlike deductions, which only reduce taxable income, this credit directly lowers the amount of taxes owed, making it one of the most valuable incentives available to businesses investing in technical work.

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The credit is governed by Internal Revenue Code Section 41 and administered by the IRS. To qualify, activities must involve technical uncertainty and a process of experimentation aimed at improving functionality, performance, reliability, or quality. Many companies overlook eligible work, especially in software development, engineering, and product design, where these criteria are often met more frequently than expected. More details can be found on the IRS website.

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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 a company benefits from the R&D tax credit

A software company invests heavily in building and improving its platform over the course of the year. Its engineering team works on developing new features, improving system performance, and solving technical challenges related to scalability and infrastructure.

Because this work involves technical uncertainty and experimentation, a portion of the company’s expenses may qualify for the R&D tax credit. This includes employee wages for engineers, payments to U.S.-based contractors, and certain development-related costs. As a result, the company can reduce its federal tax liability dollar-for-dollar based on those qualified expenses.

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

Developing new products, features, or software functionality

Improving performance, speed, or scalability of existing systems

Designing or testing new processes or technical workflows

Building internal tools or infrastructure that required experimentation

Evaluating multiple technical approaches to solve a problem

Working through uncertainty related to architecture, integrations, or data systems

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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