INSIGHT

What Do Businesses Need to Know About R&D Tax Credits: A Practical Guide 

Archie Thomas, Andre Shevchuck • February 19, 2026

Services: R&D Tax Credit

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Innovation drives business growth, but it often comes with significant costs. Many companies invest heavily in developing new products, improving processes, or creating better solutions for their customers. What they don’t realize is that these activities might qualify them for substantial tax savings. 

The Research and Development Tax Credit offers a powerful opportunity to recoup some of your investment in innovation. This federal incentive can reduce your tax liability by 6% to 10%, and qualified small businesses can offset up to $500,000 in payroll taxes annually. Despite these benefits, many companies leave money on the table simply because they don’t understand how the credit works, or assume they won’t qualify. 

This guide will walk you through everything you need to know about R&D tax credits, from eligibility requirements to the claiming process. 

Understanding the R&D Tax Credit 

The R&D Tax Credit, also known as the Research Tax Credit, was designed to encourage American businesses to invest in innovation. Originally introduced as a temporary measure under the Economic Recovery Tax Act, it became permanent through the PATH Act and now helps companies save approximately $10 billion in taxes each year. 

This credit rewards businesses that engage in qualified research activities by allowing them to reduce their federal tax liability. The goal is simple: make innovation more financially accessible so more companies can afford to push boundaries and develop new solutions. 

Who Qualifies for R&D Tax Credits? 

The good news is that businesses of all sizes and across virtually every industry can qualify for R&D tax credits. You don’t need to be a tech giant or run a laboratory to benefit from this incentive. 

Your qualification depends on whether your activities meet the IRS’s four-part test and whether you incur expenses related to Qualified Research Activities. Companies that develop new products, improve existing processes, create innovative software, or enhance their services while incurring related expenses may be eligible. 

Industries that commonly claim R&D credits include manufacturing, software development, engineering, architecture, food and beverage production, healthcare, construction, and many others. The key is demonstrating that your work involves technological innovation and meets the IRS criteria. 

What Activities and Expenses Qualify? 

According to IRS Section 41(b), qualified research activities must meet specific requirements. Your work should aim to create new or improved products, processes, or software. Activities like developing prototypes, conducting experiments, testing new materials, or engineering better solutions typically qualify. 

The IRS recognizes four main categories of eligible expenses: 

• Wages: W-2 taxable wages paid to employees who perform or directly supervise research activities count toward your credit. If an employee splits their time between qualifying and non-qualifying work, you can claim a corresponding percentage of their wages. 
• Supplies: Materials consumed during the research process qualify, though general office supplies, or other similar assets subject to depreciation, do not. 
• Computer Costs: Expenses for renting computers or using cloud services for research and development activities are eligible. 
• Contract Research: Costs for outsourced research qualify if your company retains substantial rights to the results and bears the economic risk. 

What Doesn’t Qualify? 

Not every innovation-related activity will earn you credits. The IRS excludes research conducted outside the United States, activities related to management functions, and studies in social sciences. Marketing research, quality control testing, and routine data collection also fall outside the scope of qualified activities. 

Calculating Your R&D Tax Credit 

At the federal level, the R&D tax credit has no maximum cap and typically equals approximately 10% of your qualified research expenditures. You can choose between two calculation methods: 

• Regular Method: This calculates your credit as 20% of your current year’s qualified research expenses above a base amount. The base comprises a calculated fixed-base percentage multiplied by your average gross receipts from the past four years. 
• Alternative Simplified Credit Method: This approach calculates your credit as 14% of qualified expenses exceeding 50% of your average qualified expenses from the previous three years. If you have no prior qualifying expenses, the credit becomes 6% of your current year’s expenditures. 

You can calculate your credit using both methods on Form 6765 and select that which provides greater savings. New claimants often find the Alternative Simplified Credit Method easier to navigate. 

State-Level R&D Tax Credits Add Extra Savings 

Beyond federal credits, many states offer their own R&D tax incentives with unique rules and qualification criteria. States like Florida, Georgia, Louisiana, South Carolina, and Minnesota provide additional credits that can stack with your federal benefits. 

However, availability varies significantly depending on location. Some states, including Alabama, Mississippi, and Tennessee, currently don’t offer R&D tax credits. Research your state’s specific requirements through your Department of Revenue or consult with a tax advisor to maximize your total savings. 

How to Claim Your R&D Tax Credit 

Successfully claiming your credit requires careful documentation and attention to detail. Start by reviewing all your research activities for the tax year and identifying which ones qualify. Gather supporting evidence like project records, design documents, prototypes, payroll data, and expense reports. 

The forms you’ll need depend on your business size and age. Small businesses under five years old with less than $5 million in gross receipts file Form 6765 and may also complete Form 8974 to claim credits against payroll taxes. Established businesses use Form 6765 to claim credits against income taxes. 

Learn More About Our R&D Tax Credit Services

Working With BPM  

Navigating R&D tax credits can feel overwhelming, especially when you’re focused on running your business and driving innovation. The claiming process involves complex calculations, detailed documentation requirements, and evolving regulations that change at both federal and state levels. 

BPM specializes in helping businesses identify qualifying activities, calculate credits accurately, and ensure compliance with IRS requirements. Our team stays current with the latest tax legislation and works closely with you to maximize your savings while minimizing audit risk. To learn more about maximizing tax savings derived from your investments in innovation, and ensuring compliance with IRS requirements, contact us.