RESEARCH AND DEVELOPMENT TAX CREDIT

RESEARCH & DEVELOPMENT TAX CREDIT

  • Only 33% of businesses THAT QUALIFY Actually Claim It!
  • It is Estimated, in 2024, $50 Billion of R&D Tax Credits Went Unclaimed
  • 85% of the R&D Tax Credit Are Utilized By Large Corporation Because Smaller Companies DO NOT KNOW THEY QUALIFY
  • If You Missed the Credit in the Last Three Years, IT IS Not Too Late
  • Prior to the OBB, businesses MUST amortize R&D Expenditures, By Not Claiming the R&D Tax Credit, Businesses are Increasing Their Tax Liabilities without the Benefit of Significant Tax Credits Savings
  • Even Startups That Have Not Had Profitable Year May Qualify
  • Important:  Businesses that were required to capitalize R&D expenses from 2022 through 2024 now have till June 6th, 2026 to amend prior returns and recover those deductions

The Research and Development Must Pass the Four-Part Test

Create or improve an existing product, process, technique, formulas, invention, patent or software, or improve the performance, functionality, quality, reliability or cost of a product or process (develop a new or improve an existing business component test), AND

The research is undertaken to discover information that’s technological in nature. That is, it relies on physics, biology, engineering, mathematics, or computer science. (the technological in nature test), AND

Can demonstrate that you have attempted to eliminate uncertainty about the development or improvement of a product or process (elimination of uncertainty test), AND

Demonstrate that you have evaluated alternatives for achieving the desired result, through modeling, simulation or systematic trial and error or other methods (the process of experimentation test)

R & D Tax Credit Calculator


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Our Steps to R&D Success

Getting Started

Meet with a member of our team to receive an overview of the R&D Tax Credit and review your eligibility. Our team will detail the documentation needed.

Initial Assessment

Our team will use this information & data to estimate what credit you are eligible for and establish an optimal claim timeline. If no credit is identified, there will be no cost for you!

Comprehensive R&D Study

Our technical consultants will determine the list of qualified R&D projects according the 4-part test while our tax consultants will work with you to ensure that the Qualified Research Expenditures (QREs) are accurate.

Report Writing & Finalization

Legacy’s team of Tax and Technical experts will work together to complete the calculations and provide your deliverables, including a detailed technical report and supporting documentation.

Receive your Benefits

After filing the proper documentation with the IRS and State, the R&D Tax Credit will reduce your income tax liability in the current tax year and refund for the previous 3 years. Any remaining credit can be carried forward up to 20 years.

R&D Study Review

Review your R&D Study Report with our Tax and Technical experts for the next year to increase efficiencies for future claims.

What Are the Benefits of R&D Tax Credits?

There are great advantages that R&D Tax Credits can offer a company, including:

Tax savings: The primary benefit of R&D Tax Credits is the tax savings they provide. Companies can use these credits to offset their income tax liability, reducing the amount of taxes they owe.

Cash flow: R&D Tax Credits can also provide a cash flow benefit for companies. If a company has more credits than taxes owed, it can carry the credits forward or back to offset taxes in other years

 Opportunity for innovation: By providing tax incentives for R&D activities, the government encourages companies to invest in new technologies and processes, which can lead to innovation and growth.

Competitive advantage: Companies that invest in R&D activities may gain a competitive advantage by developing new products or services, improving existing ones, or reducing costs through innovation

Job creation: R&D activities often require specialized skills and knowledge, which can lead to the creation of high-paying jobs in fields such as science, engineering, and technology

Are All Industries Eligible for the R&D Tax Credit?

The R&D Tax Credit is not limited to a specific industry. It is an activities-based tax credit. If a company’s employees or contractors are physically working in the U.S. or U.S.-controlled territories and meet the requirements of the four-part test, then you may be eligible, pending other criteria.
Below are industry-specific examples of activities your organization may be doing that could qualify for R&D tax credits:

Technology and Software Development:

⦁ Integration of new and legacy systems
⦁ Design and testing of systems, such as hardware or software
⦁ Modification of existing systems and processes to improve performance, scalability, security, or throughput
⦁ Improvements to off-the-shelf solutions to meet the needs of the taxpayer’s environment

Industrial Manufacturing:

⦁ Design, construction, and testing of prototypes or pilot models
⦁ Development of new construction or processing techniques to improve reliability in the manufacturing process
⦁ Development of new techniques to address health, safety and environmental concerns
⦁ Attempts to minimize product failure in the production process

Life Sciences and Pharmaceutical:

⦁ Experimentation with new or alternative materials or reagents into existing processes
⦁ Development of new or improved informatics or analytical tools
⦁ Clinical trials
⦁ CRO activities

Financial Services:

⦁ Integration of new platforms with in-house developed software
⦁ Development of new trading platforms
⦁ Integration of new financial products (e.g., crypto) into new or existing applications and systems
⦁ Financial modeling and the development of new algorithms

Food and Beverage:

⦁ Test kitchen activities
⦁ Development of new packaging techniques
⦁ Attempts to improve manufacturing processes

Energy Organizations:

⦁ Design and development of networks and systems to monitor energy capacity transmission
⦁ Development of new and improved batteries
⦁ Development of new biofuel production techniques

Architecture

⦁ Developing innovative design processes to enhance efficiency or sustainability
⦁ Creating software tools to streamline building design and construction workflows
⦁ Implementing advanced modeling techniques for structural analysis or energy performance optimization

Engineering:

⦁ Researching and developing new materials for use in aerospace, automotive, or electronics industries
⦁ Designing and testing prototype systems for improved product performance or safety
⦁ Innovating energy-efficient technologies for renewable energy systems or smart infrastructure

TO GET STARTED, Please fill out this form below.

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ELIGIBILTY FORM

Potential R&D Activities

Please select at least 1 option for each question. Doing so will confirm your full eligibility for an R&D credit.


R&D Frequently Asked Questions

The Credit for Increasing Research Activities (the “R&D Tax Credit”) is a government-sponsored tax incentive that rewards companies who conduct research and development in the United States and its territories. The R&D Tax Credit is a federal and state (most states) tax credit that can result in dollar-for-dollar reduction of taxes owed at year end. For startups that meet qualifying criteria, the R&D Tax Credit can be used to offset payroll taxes. Originally enacted in 1981 under the Economic Recovery Tax Act, the credit expired eight times and was extended 15 times until it was made permanent in 2015 under the Protecting Americans from Tax Hikes Act (PATH Act). Primarily a labor-based incentive, the R&D Tax Credit aims to promote U.S. innovation by creating positive cash flows and reducing taxes.

Typically, “Research and Development” implies laboratories, test tubes, and white lab coats. However, the IRS’s definition of R&D is rather broad, and can be applied to many industries including manufacturing, engineering, architecture, food & beverage, and software development. Any business of any size can claim the R&D Tax Credit if their R&D activities satisfy the 4-part test and the associated expenditures qualify under IRC Section 41.

A myriad of activities can qualify for the R&D Tax Credit. The intent of the R&D Tax Credit is to incentivize companies with employees or contractors physically in the U.S. to work on something new or improved for the company that is technically challenging and requires an iterative development process to resolve. There are two tests that companies can utilize to determine whether they have qualifying activities: 

Four-Part Test for Qualifying Activities

  • Permitted purpose: The activity performed must relate to a new or improved product, process or design (business component) in terms of: 
    • Function
    • Performance
    • Reliability
    • Quality
  • Technological in nature: The activity must fundamentally rely on principles of: 
    • Physical science
    • Biological science
    • Engineering
    • Computer science
    • Mathematics
  • Elimination of uncertainty: The activity must be intended to discover information to eliminate uncertainty concerning the capability, method, or design for developing or improving a business component.
  • Process of experimentation: The activity must be substantially related to identifying uncertainties in product, process, or design development, evaluating alternatives to eliminate those uncertainties, and testing or modeling to refine or discard those alternatives. These activities must constitute a significant portion of the company’s R&D efforts.

 

Heightened Three-Part Test: Additional Test for Internal Use Software

  1. Significant economic risk
  2. Innovativeness test
  3. Commercial unavailability

 

To help better determine eligibility, please be aware that the following activities listed below are non-qualifying activities:

  • Foreign research: Research activities conducted outside of the U.S., Puerto Rico or other U.S. territories.
  • Funded research: Research funded by a government grant or by a customer must be analyzed to determine whether the taxpayer bears significant rights to the research and economic risk associated with the research.
  • Routine testing, quality control, maintenance: Quality control testing or inspection to determine whether particular units of materials or products conform to pre-identified parameters is not qualified. Quality control testing determines if the design of a product or process is appropriate and may be qualified.
  • Adaptations, duplications, reverse engineering: Adaptation of an existing product to a particular customer requirement or needs without any technical uncertainty present.
  • Non-scientific research: Market research, efficiency surveys or advertising studies.
  • Aesthetics: Aesthetic changes to style, taste, cosmetic or seasonal changes.

Qualified research expenses include:

⦁ Employee wages: Portion of eligible W-2 box 1 wages for employees performing, directly supervising or supporting qualified research

⦁ Supplies:
⦁ Non-depreciable in nature unless related to prototypes
⦁ Extraordinary utilities
⦁ Materials used in testing
⦁ First-run production that is scrapped

⦁ Contract research: 65% of amounts paid to vendors or contractors performing research on behalf of the taxpayer physically within the U.S.

⦁ Research consortia: 75% of U.S.-based eligible work

⦁ Basic research payments: Payments made to a university or other qualified organizations

⦁ Computer lease or rentals: Amounts paid for cloud computing as it relates to development environments

These activities could qualify. There are certain requirements that must be evaluated to determine whether the R&D Tax Credit resides with you or the company that hired you.

We stand behind our work. Audit support is part of the original engagement.

The R&D credit is a well-established provision of the tax code. With a properly conducted study, the risk is minimal.

The R&D tax credit has been part of the federal tax code since 1981 and was made permanent in 2015. It is one of the most widely used business tax incentives in the country.

We conduct each study with full documentation and audit-ready deliverables, so if the IRS ever reviews the claim, your client has comprehensive support for their credit.

As with any tax position, the key is a well-documented study conducted by qualified professionals — which is exactly what we provide.

Unlimited, if applying the R&D credit against income taxes.  These credits range from 5% to 15% of qualifying R&D costs.  If taking the PATH Act R&D credit, a company can receive up to $500k* against payroll taxes and take the remainder against income taxes.

The federal R&D credit is typically 6% to 8% of qualifying research expenses (QREs), though the exact amount depends on the calculation method used and the company’s expense history.

For a company spending $500,000 on qualifying activities, that could mean $30,000–$40,000 or more in federal credit alone. Many states offer additional credits on top of that.

First-time claimants can often go back and amend the prior three tax years, which means the initial credit recovery can be significantly larger than a single year’s credit.

 

Typically federal and state tax returns, wage records, general ledger detail, and documentation of R&D activities. We guide the client’s team through organizing what’s needed.

R&D Tax Credits can be claimed by businesses in a number of industries, including software development, manufacturing, life sciences, engineering, architecture, food & beverage, aerospace & defense, and agriculture. Any company can claim R&D Tax Credits as long as they are undertaking activities that meet the requirements of the 4-part test:

⦁ Technological in Nature: The activities and process of experimentation must rely on the fundamental principles of the hard sciences, including biology, computer science, engineering, physics, or chemistry.

⦁ Permitted Purpose: In simple terms, the purpose of the activity or project must be to create something new, or improve upon a product, process, technique, software, invention, patent, or formula (referred to as a business component). The permitted purpose falls under a broad umbrella that includes improving functionality, performance, reliability, or quality of the business component. 

⦁ Elimination of Uncertainty: The activities and project in question must attempt to eliminate uncertainty related to the optimal design, development methodology, or component’s capability to achieve the permitted purpose. 

The work must address uncertainty in at least one of the following:

  • Capability: Can it be done?
  • Methodology: How should it be done?
  • Technical Design: What’s the right design to achieve the objective?

 

⦁ Process of Experimentation: Substantially all of the activities constitute elements of a process of experimentation. The activities must include a systematic evaluation of alternative solutions to eliminate the technical uncertainty through, for example, trial and error or a Product Development Lifecycle (“PDLC”).  This may include modeling, simulation, prototyping, hypothesis testing, or trial and error type approaches.

First-time claimants can often go back three years to recover credits from prior returns by filing amended returns.

When a client is claiming the R&D credit for the first time, they can typically amend their last three filed tax returns to claim credits for those prior years. This is often called a “look-back” or multi-year study.

For example, a client filing in 2026 might amend their 2025, 2024, and 2023 returns — potentially recovering credits from three or more years at once.

Each amended return is filed separately with the IRS.

As we advance, the credit can be claimed each year on the client’s original return, making it a recurring benefit.

Contrary to general belief, businesses do not have to have employees in white coats working in a laboratory to claim R&D Tax Credits. Many activities across a wide range of industries are considered qualified research expenses (QREs). Investments your company makes in developing innovative solutions, creating novel products and formulations, or even making process improvements are claimable expenses as long as the project satisfies the above 4-part test. 

You don’t need a separate R&D team. If your existing staff (engineers, developers, technicians) are developing or improving products/processes, that activity qualifies.

Minimal involvement is required beyond providing the requested information and attending key discussions. The process is structured to minimize your disruptions.

The R&D Tax Credit is a comparative credit, which means that it will depend on the difference between current year qualified research expenses (QREs) and the base amount (calculated using prior year gross receipts and/or expenses). The more research expenses a company incurs year over year, the greater the tax credit will be. Typically, a company can expect a benefit of 7-10% of the federal QREs and another 2-12% in state credits (depending on the state). 

Credits range from tens of thousands to millions annually depending on R&D spend. Even small businesses with strong R&D activity capture meaningful credits.

To get a better idea of your company’s potential R&D Tax Credit, use our Tax Calculator, or better yet, contact one of our R&D Tax Credit experts.

The R&D Tax Credit is a dollar-for-dollar reduction of federal income or payroll tax liabilities. R&D credits can be claimed on amended tax returns (going back three years), which can generate cash refunds due to overpayments in those years. Additionally, federal R&D Tax Credits roll forward for up to 20 years. 

 

For qualified small businesses (i.e. startups), these credits can be used to offset payroll tax owed to the IRS. Therefore, startups no longer need to be profitable to take advantage of the R&D Tax Credit.

 

In addition, most states also have an R&D Tax Credit available to offset various income, franchise, or sales and use tax liabilities.

Yes, if eligible R&D activities have been conducted in the past and the R&D Tax Credit has not been claimed in those years, taxpayers can still claim them for those open tax years. However, if the tax year has already been closed or the tax return has already been filed, the taxpayer cannot claim R&D Tax Credits for that particular year. This will vary from company to company, but generally, open statutes are in the current year and the prior three years. Depending on facts and circumstances (net operating losses, open audits, etc.), additional years may be open.

 

You cannot take the PATH Act R&D credit on an amended tax return.

The Protecting Americans from Tax Hikes (PATH) Act of 2015 established the Research and Development (R&D) Tax Credit as a permanent part of the Internal Revenue Code. Crucially for startups and early-stage companies, it introduced a payroll tax offset provision, allowing Qualified Small Businesses (QSBs) with under $5 million in gross receipts to apply up to $500,000 annually (post-2022 legislation) of their R&D credits directly against employer FICA payroll tax liabilities. This converts a traditional income tax credit into immediate, non-dilutive cash flow.

For Startup Companies: If your business has less than $5 million in annual revenue, and it’s been less than five (5) years since your first gross receipts/sales, you can frequently reduce your Social

Security Payroll tax liability under the PATH Act R&D credit.  If you do not qualify under the PATH Act R&D Credit, you can take regular R&D Credit against income taxes (rather than against payroll taxes).

There are three main categories of expenses that can be claimed for the R&D Tax Credit:

⦁ Wages – Wages paid to employees who conduct qualified R&D activities, and the wages of the employees who directly supervise and support the research.

⦁ Supplies – Supplies and raw materials used or consumed in the R&D process, including prototyping and testing of a new or improved product, process, formulation, or patentable business component. This also includes expenses related to rental of cloud computing assets used in software development.

⦁ Contract Research – Payments made to third-party contractors, 1099 employees, or universities for technical activities conducted on the company’s behalf. These can include technical analysis or testing, design services, and other development activities for a qualified business component.

The more research expenses a company incurs year over year, the greater the tax credit will be. For all research costs in a given year, a company can expect anywhere from 7-10% in federal credits in addition to state credits (percentage varies), where applicable.

YES! a common misconception with research and development (“R&D”) tax credits is that you must be in a profitable tax position to utilize the R&D tax credits. This was the case prior to January 1st, 2016 or before the tax credit was permanently extended as a part of the PATH Act of 2015. However, the IRS provided guidance as part of Notice 2017-23 that describes how qualified small businesses (start-ups) can offset up to $250,000 of the employer portion of payroll tax liability (social security tax) for the eligible tax year. Eligibility – Your business must have less than $5 million in gross receipts in the current tax year and your business must not have gross receipts from more than five years ago. This applies to an “on-time” filing, meaning it’s not an amended return.

 

For Startup Companies: If your business has less than $5 million in annual revenue, and it’s been less than five (5) years since your first gross receipts/sales, you can frequently reduce your Social Security Payroll tax liability under the PATH Act R&D credit. If you do not qualify under the PATH Act R&D Credit, you can take regular R&D Credit against income taxes (rather than against payroll taxes).

The following activities are excluded from R&D Tax Credits:

⦁ Research related to arts, social sciences, or humanities are not considered qualified research activities.

⦁ Research conducted outside the U.S. or its territories is not eligible. 

⦁ Projects solely aimed at adapting or duplicating existing business components and reverse engineering existing products, processes or software.

⦁ Surveys, studies, activity relating to management function/technique, market research, routine data collection, or routine testing/quality control

⦁ Some software developed for internal use, but there are exceptions for this exclusion

⦁ Research funded by any grant, contract, or another person, conglomerate, or government entity

The Tax Cuts and Jobs Act (TCJA), passed in December of 2017, amended Section 174 to require capitalization and amortization of all research and experimental (R&E) costs incurred in the tax years beginning after December 31, 2021 (2022 tax year for calendar filers). Dating back to 1954, taxpayers could deduct their expenses in the same year they were incurred on their tax returns. 

Despite the bipartisan support, and numerous bills and acts introduced to repeal or defer the amortization requirements to provide taxpayer relief in the short term, it is unclear whether a legislative fix will be signed into law anytime soon. The TCJA’s stated purpose was to be an economic incentive to bring jobs back to the U.S. Companies that have never had to separate their section 174 expenses from regular expenses will face a new challenge with the recent change.

Section 174 will affect any industry and company that performs research but the software industry will likely take the biggest hit. The TCJA specifically called out software development expenses incurred in the tax years starting after December 31, 2021, as no longer tax deductible under Rev. Proc. 2000-50. Instead, these costs must be classified as Section 174 expenses and amortized as such. 

Therefore, any software development company that previously deducted its onshore and offshore software development related expenses will now have to capitalize and amortize these costs over five years, for domestic expenses, and fifteen years, for international expenses. Software businesses that retire, dispose, or abandon a software development related project will no longer be able to fully amortize the remaining capitalized costs.

The definition of qualifying research activities in each state is based on the federal tax credit regulations; however, the calculation methodology varies significantly from state to state. For example:

⦁ Some states provide a refund or exchange of unused R&D Tax Credits, so that even if a taxpayer has no tax liability it can still derive a cash benefit.

⦁ The R&D Tax Credits in some states have not been permanently adopted, and may expire in the future.

⦁ Most states require that the research activities must be conducted within their borders to qualify.

⦁ Some states do not offer the alternative simplified credit calculation.

⦁ In some states, basic research payments made to universities and certain non-profit organizations can be included in the calculations.
There are 38 states that currently allow taxpayers to claim the R&D Tax Credit. Below is the list of states that DO NOT offer the R&D Tax Credit:

⦁ District of Columbia

⦁ Missouri

⦁ Mississippi

⦁ Montana

⦁ Nevada


⦁ Oklahoma

⦁ Oregon

⦁ South Dakota

⦁ Tennessee

⦁ Washington

⦁ West Virginia

⦁ Wyoming

Previously, CPAs and taxpayers never had to determine whether or not the businesses expenses were Section 162 or Section 174 because all expenses were fully deductible on a tax return. However, many taxpayers businesses do fall under the Section 174 requirements and will need to amortize their research expenses on their tax returns accordingly. 

Taxpayers that have already claimed the R&D tax credit and are electing to forgo the 2022 R&D tax credit to instead fully deduct research expenses as Section 162 expenses (general business expense), should speak to a CPA and closely review your options. We anticipate the IRS will have a way to identify qualified Section 174 industries and taxpayers that are not amortizing their research expenditures. If you have previously claimed the R&D tax credit, suddenly claiming expenses under Section 162 (general business expense) will raise a red flag with the IRS. Research and development companies don’t generally stop doing R&D. R&D expenses should be claimed under Section 174.

This is a common misconception among small and medium businesses. Taking the R&D Tax Credit on a timely-filed return, including extension, does not increase your company’s audit risk. According to the IRS, only 0.9% of corporate tax returns and 0.2% of small businesses (S corps and partnerships) are randomly selected for audit. 

According to IRS guidelines, a return can be selected for audit based on a myriad of reasons. There is no directive that specifically targets companies who claimed R&D Tax Credits.

In addition, prior-year federal R&D Tax Credits can be carried back one year and forward up to 20 years. Once the company reaches profitability, those credits will be available for use. Each state is different when it comes to carryforward and carryback rules, but most follow the general federal guidelines.

To be considered a QSB, a company must meet these requirements:

⦁ Less than $5 million in current-year gross receipts;

⦁ Five or fewer years of gross receipts; and,

⦁ Have qualified research expenses.

Short answer: the special retroactive window has just closed.

Here’s the situation: under the One Big Beautiful Bill Act (OBBBA), Congress restored immediate expensing of domestic R&D costs (new Section 174A) starting in 2025. It also gave small businesses (generally those under $31 million in average gross receipts) a one-time chance to amend 2022–2024 returns to retroactively fully expense Section 174 costs that had been capitalized, plus revisit related R&D credit and Section 280C elections. 

The catch: that special election deadline was July 6, 2026 — and since today is July 20, 2026, that window has already passed.

What that means going forward:

  • You missed the retroactive Section 174A election deadline. If the July 6, 2026 deadline is missed, you can still amend returns, but you’d have to follow the original Section 174 amortization rules for 2022–2024 — meaning you can’t retroactively expense those costs; the opportunity to optimize the related credit treatment is gone. 
  • You can still amend for other reasons, though — like fixing errors, claiming a credit you missed, or adjusting a 280C election — subject to the normal amended-return statute of limitations (generally 3 years from filing, or 2 years from when tax was paid, whichever is later).
  • Going forward is unaffected: full expensing under Section 174A applies automatically for tax years beginning in 2025 onward, no election needed.
  • State conformity is a separate issue — many states didn’t adopt OBBBA, so retroactive adjustments may not flow through at the state level even where they applied federally. 

 

No general extension or late-election relief exists. July 6, 2026 was a hard statutory deadline set by the OBBBA itself (one year after the law’s July 4, 2025 enactment, bumped from Saturday to Monday). It’s not an IRS-discretionary date like many filing deadlines — Congress wrote the one-year window directly into the statute, so there’s no private letter ruling or reasonable-cause relief process for missing it. If it’s passed, the retroactive Section 174A election for 2022–2024 is effectively lost, and those costs remain subject to the original Section 174 amortization rules.

The “earlier deadlines” mentioned in some sources apply to specific taxpayers, not you now — some had earlier cutoffs (e.g., if their normal 3-year refund statute closed before July 6), but nobody gets one later than July 6.

 

What’s still available to you:

  1. Prospective method change. You can still switch to full expensing starting in 2025 going forward via an automatic accounting method change (Form 3115) — you just lose the ability to reopen 2022–2024 as taxpayers who don’t want to retroactively apply Section 174A can still use an automatic accounting method change to expense R&D beginning in 2025 on a prospective basis.
  2. Ordinary amended returns (non-174A). The regular 3-year statute of limitations still applies for anything unrelated to the special 174A election — correcting math errors, claiming a missed R&D credit under normal rules, fixing other issues on a 2023–2025 return, etc. That’s a completely separate, ordinary process and isn’t affected by the July 6 cutoff.
  3. Check state-level treatment separately — since many states never conformed to OBBBA, state amended returns may follow entirely different rules and deadlines than federal.

Yes. Not every activity qualifies, and not every dollar of R&D spend is a qualified research expense. We tell clients when something doesn’t meet the four-part test. Our initial assessment does an excellent job of narrowing down candidates that later do not qualify or qualify at a lower savings

In order to understand the impact of this legislation, it’s crucial to understand the relationship between Section 174 Expenses and Section 41 Expenses. Section 174 Expenses are known as Research and Experimentation, or R&E Expenses. The expenses that fall under Sec. 174 can be divided into two categories, based on how essential each is to the activity being performed. Section 174 expenses encompass both direct and indirect research expenses (onshore and offshore) but are not necessarily eligible for the tax credit.  

Section 41 Expenses are known as Research and Development, or R&D Expenses. These are known as “Direct Research Expenses,” and are what usually come to mind when you imagine research and development. 
Section 41 expenses is a subset of Section 174 expenses, focusing only on direct research expenses that qualify for the R&D Tax Credit. 

While the R&D tax credit calculations, including the definition of QREs, are not changing, Section 41 expenses will no longer be deductible on businesses tax returns in the year they are incurred. By default, Section 41 expenses are classified as a Section 174 expense. The new Section 174 rules require companies claiming R&D credits to capitalize and amortize their expenses on their tax return—potentially increasing their tax bill and reducing their anticipated cash flow. As a result, the calculation of Section 41 should be the starting point in determining the potentially qualifying Section 174 expenditures and should be done concurrently.

Companies should work with their CPA to determine what the best estimated quarterly tax payment amount will be. If there’s no urgency to file this spring, a company should consider extending if possible—in the hopes that these changes are repealed in full or part. As CPAs wait for more guidance from the Treasury, taxpayers can still amend their 2020 and 2021 tax returns to generate unclaimed credits and potential cash refunds from prior years. And companies should look to see when they filed their 2019 tax return as the statute to amend and claim prior year refunds is three years from the filing date (2019 tax return filed in 2020). 

The R&D tax credits do expire if they’re unclaimed before statutes expire. It may be beneficial to roll the federal and state credits forward to be used to offset future income tax liabilities that may arise from the changes to Section 174 amortization. 

Yes, we’ll calculate the R&D tax credits and provide the necessary documentation & full instructions for your tax preparer to file. If you use Tax Prep Advocates, we’ll take care of the full process and file the necessary tax paperwork on your behalf as well.

No. Generally, you cannot get a refund for R&D credits from tax years beyond the 3-year amendment window.

You may, however, carry forward unused credits from those years to offset future taxes

No. The federal R&D credit itself is a non-refundable credit – it only offsets tax liabilities

However, eligible startups can receive it against payroll taxes, which is effectively a refund of those taxes.

Some states do offer refundable and partially refundable credits.

Based on current research, here are the states offering refundable (or partially refundable) state R&D tax credits, where a business can get cash back even without enough tax liability to absorb the full credit:

Fully or largely refundable

  • Arizona – the tiered system provides 20% on the first $2.5 million in qualified expenses, 11% on the next $2.5 million, and a full 24% for businesses with 150 or fewer employees, and the credit is fully refundable, though applications now go through a random-selection lottery capped at $100,000 per taxpayer and $5 million statewide.
  • Connecticut – offers a refundable credit at 65 cents on the dollar, making it one of the few states where a company can receive a cash payment even when no tax is owed.
  • New York (Excelsior R&D Credit) – provides a 50% refundable credit on the federal R&D credit amount for businesses participating in the Excelsior Jobs Program. New York’s separate Life Sciences R&D Credit is also refundable, meaning businesses can receive a cash refund if their credit exceeds their tax liability, at 15% of qualified R&D expenses (20% for businesses with fewer than 10 employees).

 

Refundable for small businesses / limited or partial refundability

  • California – the tiered rate structure and refundable option for small businesses make it a significant planning opportunity.
  • Minnesota – for tax years beginning after 2024, a portion of the credit is refundable once tax liability is reduced to zero by other credits, with the refundability rate at 19.2% for 2025, rising to 25% for 2026 and 2027. An irrevocable election must be made on a timely filed return.
  • New Mexico – both the TJRD Credit and Additional R&D Credit are refundable for small businesses, and non-refundable with a three-year carryforward for larger companies.
  • Iowa – increases the credit refund value for qualifying small biotechnology companies to 90% of the credit (previously 65%), while qualifying small businesses outside biotech may receive a refund of 65%, capped at $1.5 million per company per year (note: Iowa replaced its old program with a new, stricter one effective 2026).
  • Texas – certain non-taxpaying entities may be eligible for a refund under the restructured credit effective January 1, 2026, though this is limited.

 

Also generally cited as offering some refundability, transferability, or payroll-offset options (per state tax advisory sources): Maryland, Nebraska, New Jersey, North Dakota, Pennsylvania, Virginia — these states may provide refundable R&D tax credits, permissible sale/transfer of unused R&D credits to third parties, or payroll tax offset opportunities. Pennsylvania and New Jersey in particular allow unused credits to be sold or transferred, valuable for startups that don’t yet have sufficient tax liability.

Notable non-refundable large-credit states (for contrast): Louisiana offers very high rates (up to 30-40% for small businesses) but the credit is non-refundable, though it can be carried forward for up to 10 years.

A few caveats worth flagging: rules change often (Iowa, Minnesota, Texas, and Arizona all changed their programs within the last year), refundability is frequently restricted to small businesses or capped statewide, and program caps can mean approval isn’t guaranteed even if you qualify. 

 

Yes. You can earn the credit even with no profit. Unused credits carry forward up to 20 years, ready to offset future tax when you do have profits.

Qualifying small startups can also apply the credit to payroll taxes to get immediate benefit despite having losses

Yes. Federal R&D credits expire after 20 years if not used (and any carry-back option is only 1 year).

Some states have shorter carry-forward periods (10 or 15 years), while a few have no expiration (credits carry forward indefinitely until used).

Yes. You can do both, but not on the same dollars without adjustment. Typically, if you claim the credit, you must reduce your R&D expense deduction by the credit amount (to prevent a double benefit).

Alternatively, you can elect to take a slightly reduced credit and keep the full deduction. Either way, you still get both a deduction and a credit, just with an adjustment.

No. Claiming a legitimate R&D credit with proper documentation does not inherently trigger an audit. The IRS does review credit claims, especially large refunds, but as long as you follow the rules and substantiate your claim, you shouldn’t fear using the incentive. It’s a congressionally intended benefit for businesses.

The Section 280C(c) election, also called the 280C(c)(2) reduced credit election, lets a Section 41 R&D tax credit filer reduce the credit amount by 21 percent (the top corporate tax rate) instead of reducing the underlying R&D expense deduction by the full credit amount. Without the election, Section 280C(c)(1) requires the filer to either reduce R&D expenses by the gross credit amount or add the credit amount back to taxable income on Schedule M-1 or M-3.

Yes. Around 30+ states have their own R&D credit programs. Each state’s credit is separate from the federal credit – generally applying to research done in that state. Rules and credit percentages vary by state. If you do qualifying R&D, you can often claim both federal and state credits to maximize savings.

Yes. Software development can qualify for the R&D credit if it meets the IRS criteria of technical uncertainty and experimentation. Whether it’s developing a new app or improving internal software, those activities often qualify. (Note: there are special rules for internally developed software primarily for internal use – but many software projects still qualify, especially those with innovative features or processes).

Yes. A successful outcome is not required for the credit. Even if your project failed or the product was never launched, the research work you did can qualify, as long as it met the R&D eligibility tests. The credit rewards the attempt at innovation, not just success. So include those abandoned projects in your credit calculations if they otherwise qualify.

Failed experiments and abandoned projects are eligible. The credit applies to the process of attempting innovation, not just successful outcomes.

Yes. Normally, you claim the R&D credit when filing that year’s tax return (e.g., claim 2025 credit on your 2025 return due in 2026). If you miss it, you have up to 3 years after filing to amend and claim it.

For startups electing the payroll credit, the election must be on a timely-filed original return for that year – missing that means no payroll offset for that year.

So the annual deadline is the tax filing due date (including extensions) to maximize options, and the absolute drop-dead deadline is the amendment window expiration

We highly recommend that anyone who claims the R&D credit get a study done. An R&D study determines the total amount the business should claim and collects the necessary documentation to support that claim.

When filing for the R&D tax credit, you must submit the relevant tax forms to the IRS. However, you must also have the technical and financial justification of what you were claiming prepared in case the IRS audits your claim. If the IRS audits the claim and you can’t produce technical and financial evidence behind what you claimed, you will need to return the money and potentially pay a penalty.

We help businesses with all aspects of claiming these R&D Tax Credits.  We will:

✓ Identify and calculate qualifying R&D expenses.

✓ Prepare Forms 6765 and/or 8974.  If you use Tax Prep Advocates, we’ll file on your behalf as well.

✓ Prepare all required supporting technical and financial documentation, including documentation of research time, R&D payroll expenses, etc.  This is an important prerequisite to support an IRS audit if that happens.

✓ Coordinate with your tax preparer, payroll provider, and accountant to ensure your books and taxes are accurate.  (If requested and under a separate engagement and fee, we can prepare or amend returns.)

✓ Continually ensure the credit is applied correctly against your payroll liabilities.

✓ Email and phone support with R&D credit experts.

Yes, we offer unlimited Audit Support.  In the event of an audit, we would provide audit assistance for your study at no cost.  This includes direct discussions with our R&D tax credit experts who will advise you every step of the way and help you navigate the complex Internal Revenue Code to defend the credits you have generated. 

The R&D credit is a well-established provision of the tax code. With a properly conducted study, the risk is minimal.

The R&D tax credit has been part of the federal tax code since 1981 and was made permanent in 2015. It is one of the most widely used business tax incentives in the country.

We conduct each study with full documentation and audit-ready deliverables, so if the IRS ever reviews the claim, your client has comprehensive support for their credit.

As with any tax position, the key is a well-documented study conducted by qualified professionals — which is exactly what we provide.

Yes.  We have an Accurate Calculation Guarantee.  We guarantee every calculation up to $1M against any errors in your study.

Section 280C(c)(1) prevents a double benefit. A filer claiming the Section 41 R&D credit must either reduce deductible R&D expenses by the credit amount or add the credit back to taxable income on Schedule M-1 or M-3.

Section 280C(c)(2) gives filers a way out. By making this election, the taxpayer keeps the full deduction for R&D expenses and instead reduces the credit itself by a percentage equal to the top corporate tax rate, currently 21 percent. Under the traditional calculation method, that turns a 20 percent gross credit into roughly 15.8 percent of qualified research expenses.

Why filers usually elect: the reduced credit election is generally easier to implement on the return because it removes the need to track the expense reduction across multiple schedules and across the federal-state interface. At the top corporate rate the after-tax economics are roughly the same either way. At lower effective rates the no-election path tends to be slightly better, and at higher effective rates the election tends to be slightly better. Most CPAs default to the election unless there is a specific reason not to. Making the right call starts with understanding the claiming process itself.

The Section 280C(c)(2) election is made by checking the reduced credit election box at the top of Form 6765, Credit for Increasing Research Activities (Item A on the current form revision), and computing the reduced credit on the form. There is no separate election statement required for the standard election.

The election must be made on a timely filed original return, including extensions. Filing the return without checking the box is treated as not making the election, and the filer cannot amend the return later to make it, except in the narrow window OBBBA opened for small businesses under Section 4 of Rev. Proc. 2025-28 which expired July 6th, 2026.

The Section 280C(c)(2) election must be made on a timely filed original return, including extensions. It cannot be made on an amended return outside the Rev. Proc. 2025-28 small business window. Filers who discover the credit after filing are locked into the no-election path: taxable income rises by the full credit amount, and a meaningful share of the credit’s after-tax value is given up.

Form 6765 also has a separate Section G that became optional for 2025 returns and is mandatory for 2026 returns. Section G requires business-component-level disclosure of qualified research activities. The Section G requirement does not affect the 280C(c)(2) election directly, but it does materially change the documentation burden for any filer claiming a credit under Section 41

  1. New Section 174A: Immediate Expensing
  • Domestic R&E is deductible immediately for tax years beginning after December 31, 2024. Taxpayers may alternatively elect to amortize over a period of 60 months or more under Section 174A(c).
  • Foreign R&E is unchanged and must still be amortized over 15 years under amended Section 174.
  1. Retroactive Relief for Small Businesses
  • Eligible businesses meeting the Section 448(c) gross receipts test ($31 million or less in average annual receipts over the prior three years, inflation adjusted) can retroactively apply Section 174A expensing to 2022 through 2024.
  • Deadline: file amended returns (or administrative adjustment requests) by July 6, 2026 or the Section 6511 refund statute of limitations for the year, whichever is earlier.
  1. Permanent Coordination with Section 280C
  • OBBBA codifies that the Section 280C reduced credit election continues to apply under the Section 174A expensing regime. The election structure survived intact, and the reduction is still 21 percent.
  • Rev. Proc. 2025-28 allows eligible small businesses making the retroactive Section 174A election to also make a late Section 280C(c)(2) election, or revoke a prior one, for 2022 through 2024. This is the only circumstance in which the original-return-only rule bends. For the broader retroactive framework, see our Section 174 Repeal Update.

Worked Example: With and Without the Election

Scenario

Without the election

With the election

Taxable income

$1,000,000

$1,000,000

Add-back of R&D credit

$100,000

None

Subtotal

$1,100,000

$1,000,000

Tax at 21 percent

$231,000

$210,000

R&D credit applied

($100,000)

($79,000)

Final tax

$131,000

$131,000

At the 21 percent corporate rate, federal liability is identical either way. The choice still matters because it affects state taxes, compliance complexity, and documentation burden.

  1. The default answer for most filers at the top corporate rate is to make the election. The administrative simplicity of keeping the deduction whole and reducing the credit on Form 6765 outweighs the marginal after-tax math difference, and amending 2022 through 2024 returns under the OBBBA window can pair the election decision with meaningful cash refunds.

    The election usually wins when the filer is at or near the top federal rate of 21 percent, when the filer wants to keep the federal R&E deduction whole for state purposes in conforming states, when the filer wants to avoid M-1 or M-3 add-back complexity, or when the filer is in a state with its own version of the reduced credit election (such as California) and wants federal-state symmetry.

    The election may not be the right call in three specific scenarios. First, in a low or zero effective rate year, such as a loss year. The add-back has no immediate cash effect when there is no tax liability to inflate, so skipping the election preserves the full credit carryforward. The trade-off is that the add-back shrinks the NOL generated by the credit amount, so the two paths should be modeled against future income rather than assumed. Second, when a Qualified Small Business is applying the credit against payroll taxes under Section 41(h). The credit applies dollar for dollar against payroll tax liability, so a 21 percent reduction has direct cash impact in the current year. Third, when the filer is in a state that does not conform to Section 280C(c) and the federal-state coordination breaks down anyway.

    Strategic Tip

    QSB filers applying the credit against payroll taxes should run the math both ways

    For pre-revenue startups using the Section 41(h) payroll tax election, the no-election path is often better. Every credit dollar lost to the 21 percent reduction is a dollar that no longer reduces payroll tax, which is real cash in the current year. The deduction add-back has no immediate effect when the company has no taxable income. Run the math both ways before defaulting to the election. The decision flips for many QSB filers, and the cash difference is meaningful at early-stage credit volumes.

    State Conformity: Run the Federal-State Coordination

    The federal Section 280C(c) election does not automatically flow through to state R&D credits. State conformity varies by state and is increasingly decoupled, particularly for OBBBA-era provisions.

    Conforming states: many states with R&D credits use the federal Section 41 framework and federal Section 280C(c) treatment. In these states the federal election generally flows through, and the filer keeps the federal R&E deduction whole at the state level.

    States with their own version: California maintains its own state-law version of the reduced credit election under the California Revenue and Taxation Code. Filers claiming the California R&D credit must make a separate California election. The federal election does not control.

    Decoupled states: some states have broken from federal conformity and may not honor the federal election or may have different rules entirely. Always check state conformity before assuming the federal election will produce symmetric state treatment. For how federal and state credits interact more broadly.

    The practical implication: a filer that makes the federal election to simplify the federal return may still face Schedule M-1 or M-3 complexity at the state level if the state does not conform. The administrative simplicity argument is weaker when the state interaction recreates the same complexity in a different place on the return.

No. Taxpayers may choose the gross credit with an add-back if that yields a better net benefit.

That relief applied under Rev. Proc. 2025-28: eligible small businesses could make or revoke Section 280C elections on amended returns for 2022 through 2024 if coordinated with a Section 174A retroactive election. The window closed on July 6, 2026; elections are otherwise made on timely filed original returns.

Filing the original return without the election locks in the no election path for that year. The one exception was the OBBBA window: eligible small businesses making the retroactive Section 174A election under Rev. Proc. 2025-28 could make a late 280C(c)(2) election for 2022, 2023, or 2024 by the earlier of July 6, 2026 or the refund statute of limitations. That exception window has closed.

 

On Form 6765, Item A, filed with the timely original return.

Check the reduced credit election box at the top of Form 6765 (Item A on the current form revision) and compute the reduced credit on the form. No separate election statement is required. The election must be made on a timely filed original return, including extensions, and it is irrevocable for that year once made.

On Schedule M-1, partnerships and S-corporations generally report the add-back on line 4, and corporations on line 5, with an attached statement describing the adjustment. On Schedule M-3, partnerships and S-corporations adjust on line 29 and corporations on line 35.

The structure of Section 280C survived intact. Filers can still elect a reduced credit instead of reducing the deduction, and the reduction is still 21 percent. What changed is procedural: Rev. Proc. 2025-28 opened a one-time window for eligible small businesses to make late elections or revoke prior ones for 2022 through 2024 alongside the retroactive Section 174A election.

That window was closed on July 6, 2026.

Three common cases: loss years with NOLs, where skipping the election preserves the full credit carryforward; Qualified Small Businesses applying the credit against payroll taxes under Section 41(h), where the 21 percent reduction is real current-year cash; and non-conforming states, where the federal election fails to deliver the simplicity that justifies it. Model both paths before filing.

The common parent must make the election for all members (Treas. Reg. §1.280C-4).

After a study is complete, you client will need to make two decisions.:

  1. The Section 280C Election

You must choose between taking the full R&D credit and reducing their research expense deduction, or taking a reduced credit (roughly 65% of the full amount) and keeping their full deduction. The right choice depends on your client’s overall tax situation.

  1. The Payroll Tax Offset Election

Qualifying small businesses (generally under $5 million in gross receipts and in their first five years of having gross receipts) can elect to apply up to $500,000 of the R&D credit against their payroll tax liability instead of income tax. This is especially valuable for startups and pre-revenue companies that may not yet have income tax liability.

Yes, we can partner with Family Offices, Private Equity, and Venture Capital groups. We don’t replace the tax preparer, wealth manager, or Family Office CFO—we handle the specialized work and hand the deliverable to the existing team to file. The referring firm’s relationship with the client stays intact.

Client information stays inside the engagement: no case studies, no client logos, no anonymized-but-recognizable descriptions on our website or in our marketing. NDAs are signed on request before the first working conversation.

Once a warm introduction is made, we take the engagement from scoping through final deliverable. The referring firm is kept informed at the milestones that matter and is otherwise not asked to manage the relationship or oversee the work..

Every engagement produces a complete set of calculations, narratives, workpapers, and forms—the documentation an auditor would request. We follow the same disciplined process for every client, and audit support is included in the original engagement.

Our deliverables contain the calculations, narratives, and supporting workpapers an auditor would request. We follow the same process for every engagement, and audit support is included at no extra charge.

We integrate into the CPA’s or Preparer’s client relationship—never around it. You remain the primary tax preparer and advisor, and we handle the specialized R&D credit work. Our deliverable is a complete, audit-ready package your team can file with confidence.

No. We handle all of the technical tax work. Your firm doesn’t need any prior R&D credit expertise.

This is one of the most important things to understand: you do not need to learn R&D tax law to offer this as a service to your clients.

Our team of R&D tax specialists conducts the entire study — from qualifying activities analysis to credit calculation to preparing the deliverables. Your firm’s role is limited to:

  • Identifying and inviting clients who may benefit (we help with this too)
  • Helping your client make two tax elections after the study is complete
  • Filing the returns that claim the credit

You don’t need to gather documents, interview your client’s employees, or perform any technical analysis.

Minimal. As the CPA or tax preparer, you’ll handle the filing — and sometimes amendments — but we request only the documents we can’t obtain directly from the client, and we deliver the completed forms and substantiation you need to file. We’re ready to field any questions you have throughout the process.

The Research & Development (R&D) Tax Credit under IRC Section 41 is not expiring on July 6, 2026. Businesses can continue to claim the R&D credit if they qualify. There is no July 6 expiration for the credit itself.

The July 6, 2026 deadline is a special election created after the 2025 tax law changes:

  • Eligible small businesses (generally those with average annual gross receipts of $31 million or less) can make a retroactive election to immediately deduct domestic R&D expenditures for tax years 2022, 2023, and 2024 instead of amortizing them over five years.
  • To obtain that retroactive relief, amended returns or elections generally must be filed by July 6, 2026, or earlier if the normal refund statute under IRC Section 6511 expires first. For some 2022 returns, the three-year statute may have already expired before July 6, making the earlier date the controlling deadline.

So there are really two separate issues:

ProvisionJuly 6, 2026 Deadline?
R&D Tax Credit (IRC §41)No
Retroactive Section 174 immediate expensing election for 2022–2024 domestic R&DYes, for eligible taxpayers (subject to the earlier refund statute)

Given your previous questions about tax credits, this July 6 deadline could be a significant opportunity if you have clients who:

  • were required to amortize domestic R&D costs in 2022–2024,
  • qualify as small businesses under the gross receipts test, and
  • have not yet amended their returns.

In summary, businesses that have never taken the R&D Tax Credit and qualify can file for 2025 forward, and STILL  has any remaining three-year refund statute if the business qualified in the prior three years!