Key Take Aways
– The activities-based Federal R&D Tax Credit allows qualified businesses to obtain a dollar-for-dollar reduction in tax liability.
– Qualifying activities include the development or improvement of products, processes, software, formulas, and more. Businesses in many different industries may claim the Credit.
– If research activity passes the Four-Part Test, it qualifies for the Credit.
– Qualified Research Expenses(QREs) include wages, supplies/materials, cloud hosting, and third-party contractors. The determination of QREs is a nuanced endeavor.
– A rough estimate of Credit amount can be easily calculated, but is dependent on the accuracy of the QREs employed. It can be quite difficult to determine accurate QRE values – there are
multiple caveats and nuances involved. Credit estimates are only as good as the QRE values used to obtain them. Online Credit Calculators are subject to the same inherent flaw.
– The Credit should be calculated by an R&D specialist, who will select between the Regular Research Credit (RRC) Method and the Alternative Simplified Credit (ASC) Method.
– The Credit is claimed using IRS Form 6765, and “sufficient documentation” is required.
– The Payroll R&D Credit is a modified version of the R&D Tax Credit for Qualified Small Businesses (QSBs).
– The Federal credit is permanent. It may be claimed back 3 years, and carried forward for 20 years.
– Claiming the Federal R&D Tax Credit does not increase the likelihood of an audit.
– Over 40 states have their own state-specific R&D Tax Credits, which can be used in conjunction with the Federal Credit.

​​What is the Federal Research and Development (R&D) Tax Credit?
The Federal Research and Development (R&D) Tax Credit — also known as the Research and Experimentation (R&E) Tax Credit — is an activities-based tax credit for companies that incur R&D expenses in the United States. Based on IRC § 41 & § 174, the Credit is intended to incentivize innovation and experimentation.
Eligible taxpayers may claim qualifying expenses – wages, supplies, contract research, cloud hosting – for a dollar-for-dollar reduction in tax liability.
The Credit has undergone quite an evolution over the years.

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Bruce Johnson

As a founding partner at Capstan Tax Strategies, Bruce works closely with commercial real estate owners, investors, and accounting firms to provide practical, creative and client-specific solutions.