R&D Tax Credit FAQ

Here you’ll find answers to the most common questions about R&D Tax Credits

General R&D Tax Credit Questions

The US federal R&D tax credit (also known as the Research & Experimentation Credit under Section 41 of the Internal Revenue Code) is a dollar-for-dollar reduction in tax liability designed to encourage American businesses to invest in innovation.

Companies can claim credits for qualified research expenses (QREs) related to developing new or improved products, processes, software, techniques, or formulas. The credit typically ranges from 6-10% of qualifying R&D expenditures, with many states offering additional credits on top of the federal benefit.

Any US business conducting qualified research activities may be eligible, regardless of industry. Qualifying companies include software developers, manufacturers, life sciences firms, cleantech innovators, engineering companies, and many others.

You don’t need to be a large corporation or have a formal R&D department. If your business is developing new products, improving existing processes, or solving technical uncertainties, you likely qualify. Both profitable companies and pre-revenue startups can benefit, with startups able to apply up to $500,000 of credits against payroll taxes annually.

To qualify, your R&D activities must pass the four-part test:  

  1. The activity must be technological in nature, relying on principles of physical or biological science, engineering, or computer science 
  1. The activity must be undertaken to develop a new or improved business component (product, process, software, technique, formula, or invention) 
  1. The activity must be conducted to eliminate technical uncertainty about the development or improvement of the business component 
  1. The process of experimentation must include testing, modeling, simulation, or systematic trial and error. Common qualifying activities include software development, prototyping, process improvements, formulation development, and technical testing. 

The federal R&D tax credit typically provides 6-10% of qualified research expenses as a direct tax reduction.

When combined with state R&D credits (available in 37 states), businesses often see combined savings of 12-16 cents for every qualified dollar spent on R&D.

For a company spending $500,000 annually on qualifying R&D activities, this translates to approximately $30,000-$80,000 in combined federal and state tax savings. These are dollar-for-dollar reductions in tax liability, not just deductions that reduce taxable income.

These are two distinct but complementary benefits.

The R&D tax credit (Section 41) provides a dollar-for-dollar reduction in your tax liability based on qualifying research expenditures.

R&D expense deductions (Section 174A) allow you to deduct the cost of domestic research activities from your taxable income in the year incurred. Thanks to the OBBBA, you can now both deduct domestic R&D expenses immediately AND claim the tax credit on those same expenses, maximizing your tax benefit. Foreign R&D expenses must still be amortized over 15 years.

R&D Tax Credit Qualification & Eligibility

To qualify, your R&D activities must pass the four-part test:

  1. The activity must be technological in nature, relying on principles of physical or biological science, engineering, or computer science
  2. The activity must be undertaken to develop a new or improved business component (product, process, software, technique, formula, or invention)
  3. The activity must be conducted to eliminate technical uncertainty about the development or improvement of the business component
  4. The process of experimentation must include testing, modeling, simulation, or systematic trial and error. Common qualifying activities include software development, prototyping, process improvements, formulation development, and technical testing.

Qualified Research Expenses include:

  • Wages paid to employees directly performing, supervising, or supporting qualified research activities
  • Supplies consumed or used in the research process (excluding land, depreciable property, or items used after commercial production begins)
  • Contract research expenses paid to third parties to conduct qualified research on your behalf (limited to 65% of the amount paid)
  • Cloud computing costs related to qualified research activities.

Note that expenses must be for research conducted within the United States and related to your trade or business to qualify.

No. Many businesses conducting qualifying research don’t have dedicated R&D departments or even realize they’re doing “R&D.”

If your engineers, developers, or technical staff are solving technical problems, developing new features, improving products or processes, or eliminating technical uncertainty, you’re likely conducting qualifying research. The credit is designed to reward practical innovation happening across your business operations, not just formal laboratory research.

No. While patents can be evidence of R&D activity, they are not required to claim the credit. The vast majority of qualifying research never results in patents. What matters is whether you’re conducting systematic experimentation to resolve technical uncertainty, not whether your innovations are ultimately patented or even successful.

Excluded activities include:

  • Research conducted after commercial production begins
  • Adaptation of existing business components without technological innovation
  • Duplication of existing business components
  • Surveys, studies, or research in social sciences
  • Research outside the United States; research funded by another party (grants, contracts, or subsidies may require expense reductions)
  • Activities related to internal-use software unless certain requirements are met. Additionally, routine data collection, quality control testing, and cosmetic or style changes typically don’t qualify.

Legislative Changes Impacting R&D Tax Credits

The One Big Beautiful Bill Act allows businesses to immediately deduct domestic R&D expenses in the year incurred for tax years beginning after December 31, 2024. This reverses the Tax Cuts and Jobs Act requirement to capitalize and amortize these costs over five years. For expenses incurred in 2022-2024 that were previously capitalized, you have two transition options:

(1) Deduct the entire remaining unamortized balance on your 2025 tax return

or

(2) Split the deduction equally between your 2025 and 2026 tax returns. This flexibility allows you to optimize your tax strategy based on projected income and tax positions.

If your business qualifies as a small business (average annual gross receipts under $31 million for 2022-2024), you can elect to apply the new immediate expensing rules retroactively by amending returns for tax years beginning after December 31, 2021.

This means amending 2022, 2023, and 2024 returns to deduct previously capitalized R&D expenses, potentially generating significant refunds. The deadline for this retroactive election is July 4, 2026. However, if you’re a partnership or S-Corp, amending entity returns may require your owners to also amend their personal returns.

The IRS has significantly enhanced Form 6765 documentation requirements. Section G, which requires detailed business component information including project names, information sought, breakdown of qualified research expenses per component, and wage breakdowns by involvement level, is optional for tax year 2025 but becomes mandatory for most filers starting with tax year 2026 (returns filed in 2027).

Small businesses with total qualified research expenses of $1.5 million or less and gross receipts of $50 million or less, as well as qualified small businesses electing the payroll tax credit, are exempt from Section G.

Even though it’s optional for 2025, we strongly recommend preparing this documentation now to ensure systems are ready for mandatory compliance.

State conformity to federal changes varies significantly.

Some states already allow full expensing of R&D costs and won’t be affected. Others may continue requiring amortization until state legislatures act to conform to the OBBBA changes. Additionally, states have different conformity dates; they adopt the federal tax code as of a specific date, and may not have adopted the 2025 federal changes yet. This creates potential compliance complexity where you follow federal rules for federal returns but different rules for state returns. It’s essential to review each state’s specific treatment of R&D expenses where you do business.

R&D Tax Credit Claims Process

The federal R&D tax credit is claimed by completing Form 6765 (Credit for Increasing Research Activities) and attaching it to your business tax return.

The form requires you to calculate your qualified research expenses, determine your base amount (if using the regular credit method), and compute the credit using either the regular credit or alternative simplified credit method.

For refund claims on amended returns filed after June 18, 2024, you must also attach detailed schedules identifying business components, qualified activities, and how expenses relate to those components per Chief Counsel Memorandum 20214101F.

The Regular Credit calculates your benefit based on increases in R&D spending above a base amount computed from your historical spending patterns. This method typically provides a higher credit percentage (up to 20%) but requires maintaining data from prior years.

The Alternative Simplified Credit (ASC) is simpler: it’s calculated as 14% of qualifying expenses exceeding 50% of your average R&D spending over the prior three years, or 6% of current-year expenses if you have no prior R&D history. Most businesses benefit from modeling both methods to determine which provides the greater benefit.

Yes. Qualified Small Businesses (QSBs), which are defined as businesses with gross receipts of $50 million or less in the credit year and that have had gross receipts for five years or fewer, can apply up to $500,000 of their federal R&D credit against payroll taxes (employer portion of Social Security taxes) annually, even if they have no income tax liability.

This makes the credit immediately valuable for pre-revenue startups actively hiring and developing new technologies. The payroll tax credit election must be made on an originally filed return (including extensions) using Form 6765.

Yes. You can generally file amended returns to claim missed R&D credits for the prior three years.

For example, for calendar-year 2022 returns filed March 15, 2023, the statute of limitations expires March 15, 2026. This means some 2022 amendment deadlines could be as soon as March 2026.

Additionally, small businesses (under $31 million gross receipts) have until July 4, 2026 to elect retroactive treatment of 2022-2024 R&D expenses under the OBBBA. Given these tight timelines and potential IRS processing delays, it’s important to act quickly if you have unclaimed credits.

Robust documentation is critical for audit defense. You should maintain:

  • Detailed descriptions of each business component (product, process, software, etc.) under development
  • Documentation of the technical uncertainty you sought to eliminate
  • Records of the process of experimentation conducted (testing, modeling, prototypes, etc.)
  • Time tracking or credible contemporaneous evidence showing which employees worked on qualifying activities and for how long
  • Financial records tying qualified expenses to specific research projects
  • Technical documentation like project plans, design documents, test results, and meeting notes.

Recent court cases emphasize that proper documentation practices are crucial for successfully defending claims.

State R&D Tax Credits

As of 2026, 37 states offer their own R&D tax credit programs.

Major programs include California, Texas, New York, Massachusetts, Pennsylvania, Georgia, and many others.

Each state has unique rules regarding credit calculation, carryforward provisions, transferability, and refundability. Some states offer generous refundable credits (meaning you can receive cash refunds even without state tax liability), while others only allow credits to offset state income tax.

Many states have also seen recent program changes. For example, Iowa replaced its legacy program with a more restrictive credit effective for tax year 2026, while Michigan reestablished its R&D credit beginning January 1, 2025 after being inactive since 2012.

State R&D credits are claimed separately on your state tax returns and typically calculated as a percentage of the same qualified research expenses used for federal purposes, though state definitions may vary.

You can claim both federal and state credits on the same qualifying activities, essentially stacking benefits.

For example, a company might receive a 7% federal credit plus an additional 6% state credit, for combined savings of 13% on qualifying R&D spending. However, some states require adjustments for federal credits received or have different qualifying activity definitions, so careful compliance with each state’s specific rules is essential.

Texas restructured its incentives effective January 1, 2026, increasing the base credit rate to 8.722% (from 5%) and offering 10.903% for research with Texas higher education institutions. Credits are capped at 50% of franchise tax due with 20-year carryforwards.

California offers credits calculated similarly to the federal program, with no cap and unlimited carryforward. The state also offers credits for basic research payments.

Michigan reestablished its R&D credit starting January 1, 2025 with tentative claims due April 1, 2026 for 2025 expenses, offering a refundable credit for qualifying small businesses.

Pennsylvania provides a 10% credit on qualified research expenses with a 20% bonus for research conducted with Pennsylvania universities.

New York offers multiple R&D credit options including credits at the Empire State Development research zones.

Boast & The R&D Tax Credit Process

Boast combines advanced AI-powered technology with specialized R&D tax expertise to maximize your credit while minimizing effort.

  1. Our platform integrates with your financial, payroll, and project management systems to automatically identify and document qualifying R&D activities across your organization.
  2. The Boast AI classifier analyzes your entire R&D digital footprint, assigns confidence scores to gauge tax credit eligibility, and ensures every qualifying minute and dollar is captured.
  3. Our in-house R&D tax experts then review and optimize every claim, applying decades of experience navigating complex federal and state requirements to secure the highest possible returns while maintaining audit-proof documentation.

Unlike Big 6 accounting firms (Grant Thornton, BDO, EY, KPMG, Deloitte, PwC) that treat R&D credits as just another service line within their broad portfolios, R&D tax credits are Boast’s core focus and expertise.

Big 6 firms rely on manual, time-intensive processes that are slow and error-prone, often missing qualifying activities due to their generic approach.

Boast’s platform provides end-to-end automation from data collection through claim submission, delivering faster turnarounds and fewer errors. Most importantly, Boast’s team speaks the specialized language of R&D tax credits; we have decades of combined experience working directly with the IRS and state agencies, creating audit-proof documentation from day one rather than scrambling to support claims after the fact.

While tech-first competitors promise low-cost automated solutions, they fundamentally miss the strategic expertise required to maximize your returns.

R&D tax credits require understanding subjective qualification criteria, navigating complex federal and state requirements, and building relationships with government agencies, an area where pure technology falls short.

Boast delivers true technology-plus-expert partnership: our platform handles data collection and qualification while seasoned R&D tax specialists optimize every claim for maximum value. We’ve recovered 25-40% more credits than tech-only competitors by identifying qualifying activities that algorithms miss, and we provide comprehensive audit defense rather than disappearing when the IRS comes calling.

Unlike traditional approaches that can take months and consume dozens of hours from your team, Boast streamlines the process to approximately 5 hours of your team’s time.

How Boast works

Our automated platform connects directly to your financial and technical systems, eliminating manual data gathering. Most clients complete initial setup within 2-3 weeks, with subsequent annual claims processed even faster thanks to our centralized claim portal that maintains organized historical data. This efficiency allows your engineers and R&D teams to focus on innovation rather than attending extensive meetings to manually document their work.

Since 2011, Boast has helped more than 2,000 businesses across North America access over $675 million in R&D tax credits and innovation capital.

We maintain comprehensive audit defense for every claim. More than 98% of Boast claims are delivered without an audit, and when our customers do hear from the IRS or state agencies, we recover up to 95% of the estimated claim.

Unlike competitors who disappear after claim submission, Boast stands with you through the entire audit process, representing you at every step so it’s not a burden to your team. Our 100% audit defense commitment is backed by decades of specialized expertise and audit-proof documentation built into every claim from day one.

Yes. Boast serves businesses ranging from pre-revenue startups to established mid-market and enterprise companies across all industries.

For startups, we specialize in helping Qualified Small Businesses access the payroll tax credit (up to $500,000 annually against employer Social Security taxes), providing immediate cash flow even before profitability.

For growth-stage and established companies, we maximize both federal and state R&D credits while ensuring compliance with increasingly complex IRS reporting requirements. Unlike Big 6 firms that focus primarily on large enterprises, or tech-only competitors that target only startups, Boast’s hybrid technology-plus-expertise model scales effectively across company sizes and complexity levels.

Audit & Compliance

R&D tax credit audits typically focus on whether your activities meet the four-part test, whether expenses are properly categorized as QREs, and whether you have adequate documentation substantiating your claims.

The IRS will request detailed information about specific business components, technical uncertainties addressed, processes of experimentation conducted, and how you tracked time and expenses.

Recent Chief Counsel Memorandum 20214101F has increased documentation expectations, requiring detailed business component identification and nexus between costs and activities.

With Boast, you’re protected: our platform creates comprehensive audit documentation from day one, and our expert team represents you through the entire audit process at no additional cost.

The key is robust contemporaneous documentation. Maintain detailed project records showing including:

  • what you were developing (business component)
  • why it was uncertain (technical challenges)
  • how you attempted to resolve uncertainty (process of experimentation)
  • who worked on it and for how long (time allocation)
  • what costs were incurred.

Boast’s platform automatically creates this documentation as you work. Our secure, SOC 2 Type 2 certified portal maintains organized records of all claim descriptions, supporting documents, and files, readily accessible for audit presentation. Our AI-powered time evidence engine derives precise time allocation from your technical data without burdensome manual tracking, while our financial data hub integrates directly with your accounting and payroll systems to create bulletproof expense substantiation.

The IRS has increased scrutiny of R&D credits in recent years, particularly for large credit claims, claims with significant year-over-year changes, industries with historically high abuse rates, and claims lacking adequate business component documentation.

Recent court cases (Little Sandy Coal, Phoenix Design Group, Meyer Borgman and Johnson) emphasize that inadequate documentation is the primary reason credits are reduced or disallowed during audits.

The enhanced Form 6765 Section G requirements (mandatory starting tax year 2026) reflect the IRS’s focus on detailed business component and activity-level substantiation.

Working with Boast ensures your documentation meets or exceeds IRS expectations before submission.

Yes. Audit defense is built into every Boast engagement at no additional cost. If you receive an IRS or state agency inquiry, our experienced R&D tax team (with decades of combined experience working directly with government agencies) handles the entire audit process on your behalf. We represent you through information document requests, examinations, and appeals if necessary.

Because Boast’s platform maintains comprehensive audit documentation from day one (project descriptions, technical records, time tracking, expense substantiation), we’re prepared for audits before they happen rather than scrambling to reconstruct information. This proactive approach contributes to our exceptional results: when our customers are audited, we recover up to 95% of the estimated claim.

Getting Started

If your business develops new products, improves existing products or processes, creates software, solves technical problems, or innovates in any way, you likely qualify.

The easiest way to determine eligibility is to schedule a free assessment with Boast’s R&D tax experts. We’ll review your business activities, identify qualifying R&D work you may not recognize as “R&D,” estimate your potential credit, and explain how our platform can maximize your returns. There’s no obligation and no cost for this initial evaluation.

To begin, we’ll need access to basic financial information (revenue, payroll data, general ledger), a high-level overview of your technical or product development activities, and understanding of your organizational structure.

Boast’s platform securely integrates with your existing financial, payroll, and project management systems (we integrate with hundreds of platforms), so we can extract data directly rather than requiring manual compilation. Most companies can complete our initial onboarding in just a few hours of time commitment.

Yes. Boast helps companies maximize current-year R&D credits through ongoing platform use and expert support, and we can also recover missed credits from prior years by preparing and filing amended returns.

Given the July 4, 2026 deadline for small businesses to elect retroactive R&D expense treatment under the OBBBA, and the approaching statute of limitations for some 2022 returns, it’s important to act quickly if you have unclaimed credits.

Our team can help you evaluate retroactive opportunities, determine optimal deduction strategies, and coordinate amendments across federal, state, partnership, and individual returns as needed.

Boast operates on a success-based fee structure aligned with the value we deliver. We only get paid when you receive R&D tax credits. If no credit is identified, there’s no cost to you.

Our pricing is transparent and competitive, typically ranging from 15-25% of the credit secured depending on engagement scope and complexity.

Unlike Big 6 firms that charge high hourly rates regardless of outcomes, or tech-only competitors whose low upfront costs result in significantly smaller credits, Boast’s model ensures we’re incentivized to maximize your return.

Schedule a free assessment to receive a customized proposal for your situation.

Getting started is simple. Schedule a free consultation with our R&D tax experts.

We’ll conduct an initial assessment of your eligibility, provide an estimated credit calculation, and explain how Boast’s platform and expertise can maximize your returns while minimizing time and effort from your team.

If we determine you’re likely to benefit, we’ll develop a customized engagement plan and timeline. From there, we handle the heavy lifting, integrating with your systems, identifying qualifying activities, preparing comprehensive documentation, and filing your claims. Most companies are surprised by how large their potential credits are and how straightforward Boast makes the entire process.

Ready to maximize your R&D tax credits?

Boast has helped more than 2,000 companies across North America access over $675 million in innovation capital. Our hybrid technology-plus-expertise approach combines AI-powered automation with specialized R&D tax knowledge to deliver larger credits with less effort and 100% audit defense.

About Boast

Boast specializes in helping organizations claim and access eligible R&D tax credits, minimizing audit risks and time-consuming processes in Canada and the United States. Boast combines in-house technical and R&D tax expertise with advanced AI technology to help companies effortlessly navigate the complexities of tax credits, enabling them to focus on what they do best: Innovate.

This FAQ is intended for informational purposes only and does not constitute tax, legal, or financial advice. Consult with qualified tax professionals to determine your specific eligibility and optimal claiming strategy.