R&D Tax Credit 

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Companies that develop new products, improve existing processes, or engineer better solutions are often performing work that qualifies for the federal Research and Development Tax Credit under IRC Section 41, and many are not claiming it. The credit offers a direct reduction in federal tax liability, typically equal to 10% of qualified research expenditures, with no cap on the credit amount. For qualified small businesses, the credit can also be applied against up to $500,000 in payroll taxes annually, making the credit’s benefit accessible even before a business reaches profitability. 

BPM’s R&D tax credit specialists help businesses identify qualifying activities, build defensible credit studies, and claim the resulting credits earned through costs incurred toward R&D activities. 

Who Qualifies for the R&D Tax Credit 

The R&D Tax Credit is broader in scope than many businesses might assume. Qualification depends on whether activities meet the following “four-part test” criteria: 

  • Technological in Nature: Activities must involve principles of engineering, computer science, physical science, biological science, or other similar hard sciences. 
  • Permitted Purpose: Activities must be intended to develop a new or improved product or process. 
  • Elimination of Uncertainty: Activities must involve attempts to eliminate technical uncertainties, such as capability, methodology, or design uncertainty. 
  • Process of Experimentation: Activities must involve a thorough scientific process of experimentation in which multiple alternatives are tested against a hypothesis, performed in an attempt to resolve existing technical uncertainties. 

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Businesses that incur expenses related to the described four-part test criteria may be eligible regardless of industry or company size, without requiring the existence of a formal research department or laboratory setting. Businesses across manufacturing, technology, life sciences, and agribusiness regularly generate qualifying activities, as does any organization whose work involves technical problem-solving beyond the routine application of established knowledge. 

Qualifying Expenses 

The credit is calculated on four categories of qualified research expenditures: 

  • Wages: Taxable W-2 compensation paid to employees who perform, directly supervise, or directly support qualifying research activities. 
  • Supplies: Materials consumed during the research or testing process, excluding general office supplies, or other depreciable assets with a useful life of greater than one year. 
  • Computer Lease: Expenses for renting or leasing cloud computing space used in qualified research, which would generally be used for pre-production testing. 
  • Contract research: Costs for third-party research activities, provided the business retains substantial rights to the results and bears the financial risk of costs incurred. 

How BPM Helps 

BPM’s R&D tax credit practice works with clients across the full credit lifecycle. Our professionals conduct detailed activity-level reviews to identify qualifying work, interview key personnel to document the nature and scope of research activities, calculate credits using the computation methods that produce the greatest benefit, and prepare studies designed to withstand IRS scrutiny. 

For businesses that have not previously claimed the credit, we also evaluate prior tax years for potential historical credit claims that may be used in the businesses’ current or future tax years. BPM’s R&D tax credit specialists are ready to help you determine whether your business qualifies and how much you may be able to claim. Contact us to start a conversation. 

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