R&D Tax Credits
What Are R&D Tax Credits & Why They Matter for Your Business
Research & Development (R&D) tax credits are incentives offered by the IRS to encourage companies to invest in innovation. These credits can provide significant savings by lowering your business’s tax liability, making it more affordable to invest in experimentation, product development, and technological advancement.
For many small businesses and startups, R&D credits are an underutilized opportunity. They allow companies to recoup dollars spent on qualified research activities—whether that’s developing software, improving manufacturing processes, or prototyping new products.
Who Qualifies for R&D Tax Credits?
R&D tax credits are not just for big labs or tech giants. According to the IRS, “qualified research” must meet certain standards, including:
Technological in nature – The work should rely on the sciences, engineering, or computer science.
Intent to develop or improve a business component – You should be working toward a new or improved product, process, or software.
Experimental or iterative process – There must be a process of trial and error, testing hypotheses, or solving technical uncertainty.
Documentation and support – You’ll need records to substantiate the work: technical documents, payroll, supply costs, invoices, timesheets, etc.
Expenses that can qualify include:
Employee wages (engineers, scientists, developers)
Supplies used in R&D (materials for prototyping, testing)
Contract research paid to independent researchers
Certain cloud costs (for software testing environments)
How the R&D Credit Works: Key Paths & Calculations
Claiming the Credit (Form 6765)
To claim the R&D credit, businesses must file IRS Form 6765: Credit for Increasing Research Activities. IRS On this form, there are a few options:
Regular Credit Method (Section A): Traditional way to calculate credit.
Alternative Simplified Credit (ASC) (Section B): Easier to calculate for many businesses.
Special elections for small or qualified businesses (Section D), including electing to use the credit against payroll taxes.
Payroll Tax Option for Small Businesses
If you’re a qualified small business (QSB), you may be eligible to apply part—or all—of the credit against payroll taxes (Social Security and Medicare) instead of income tax.
The maximum credit election used against payroll taxes was increased to $500,000 for tax years beginning after 2022.
Use Form 6765 and then Form 8974 to claim this payroll tax credit.
Benefits of R&D Tax Credits
Reduce Tax Liability: This is a dollar-for-dollar credit (not just a deduction), so it directly reduces how much you owe.
Encourage Innovation: Credits help cover the cost of experimentation and product development, making R&D more financially viable.
Cash Flow Boost: For startups or early-stage companies, using the credit against payroll taxes (if eligible) can significantly improve cash flow.
Carryforward Options: Unused credits can often be carried forward to future years.
Pitfalls & Key Considerations
Documentation is critical: The IRS expects detailed records—technical documents, timesheets, invoices, contracts, and more. Without this, your credit claim risk being reduced or denied.
Not all “experiments” qualify: Pure marketing research, routine quality control, or non-technological work typically don’t make the cut.
Amortization rules changed: Under Section 174, certain R&D costs may need to be capitalized and amortized.
Audit risk: Because the credit can be substantial, improper claims can trigger IRS scrutiny.
Election timing matters: Payroll credit election must be made by the income tax return due date (including extensions).
Q&A: Common Questions About R&D Tax Credits
Q: Can any business claim R&D credits?
A: Not quite. While many types of businesses can qualify, the R&D work must meet IRS criteria (technological uncertainty, experimentation, etc.).
Q: How much credit can I expect?
A: It depends on your qualified research expenses (QREs). According to ADP, many companies claim 6–8% of their QREs as a credit.
Q: What if my business isn’t yet profitable?
A: If you’re a qualified small business, you might use the credit against payroll taxes instead of income taxes, improving your cash flow.
Q: Can I amend past tax returns to claim R&D credits?
A: Yes—if the statute of limitations allows. According to BDO, you generally have three years from the original return filing date to amend.
Q: Is there a risk of claiming too much?
A: Yes—without proper documentation and justification, the IRS may audit or disallow part of your claim. Make sure you have detailed records to back up your R&D activities.
How Brecken Business Solutions Can Help
Navigating R&D tax credits can be complex, but it’s a high-value opportunity for many businesses. At Brecken Business Solutions, we help companies:
Identify and quantify qualifying R&D activities
Maintain the documentation needed to substantiate your claim
Complete and file Form 6765 (and Form 8974 if claiming payroll credit) accurately
Develop a sustainable R&D credit strategy year-over-year
Our team specializes in small and midsized businesses—whether you're a startup investing in product innovation or an established company scaling your R&D efforts, we’ll help you maximize the credit while minimizing risk.
Call to Action
Ready to explore whether your business qualifies for R&D tax credits and unlock potential savings?
Contact us at Brecken Business Solutions today to schedule a free consultation and let us guide you through the process.
