1. Technological in Nature
Activities must rely on principles of physical or biological sciences, engineering, or computer science.
R&D Tax Credits
The Research & Development (“R&D”) Tax Credit is one of the most valuable dollar-for-dollar tax incentives available under the Internal Revenue Code. Designed to encourage innovation and investment in the United States, the credit rewards businesses that design, develop, or improve products, software, or processes. Companies across a wide range of industries may qualify, often without realizing it.
Understanding R&D Tax Credits
The R&D Tax Credit allows eligible businesses to reduce their federal and state income tax liabilities by claiming credits for qualified research activities within the United States. Businesses may qualify for a credit of up to 10% on eligible expenses, including wages, supplies, cloud services, and contractor payments.
Many businesses are surprised to learn they qualify for R&D tax credits, even without operating in a traditional “lab” environment. In fact, many companies in software development, manufacturing, engineering, and other innovation-driven industries are eligible. Qualifying activities generally involve technical uncertainty and experimentation aimed at improving the functionality, performance, reliability, or quality of products, processes, or software.
In addition to offsetting federal income taxes, eligible businesses may use the R&D tax credit to offset the employer portion of payroll taxes (i.e., FICA/Medicare), allowing companies to benefit from the credit even if they are not yet profitable.
To qualify for the payroll tax offset, a company must meet the following criteria:
- Incurred gross receipts for five years or less
- Generated less than $5 million in gross receipts in the year the credit is claimed
The Four-Part Test for Qualified Research
A formal R&D tax credit study typically evaluates projects against the IRS four-part test to determine eligibility. To qualify for the R&D Tax Credit, a project must meet all four of the following criteria:
Examples of Qualifying R&D Activities
R&D activities exist across many industries. The examples below highlight the various activities that many businesses perform daily that can qualify for the R&D tax credit.
Product Development
Designing new products, prototypes, or models
Software Development
Creating, testing, or enhancing software, including artificial intelligence and machine learning
Manufacturing Improvements
Developing more efficient, automated, or environmentally friendly manufacturing processes
Engineering and Design
Creating technical designs, blueprints, and CAD models
Testing and Evaluation
Conducting feasibility studies, beta testing, and quality control on new or improved designs
Material Evaluation
Testing alternative materials to improve durability or performance
Connect with Our Leaders
Related Insights
The Energy Industry Is Driving Innovation and the R&D Tax Credit Confirms It
When people think of research and development (R&D), they often picture tech startups or pharmaceutical labs; rarely does the conversation turn to oil and gas. Yet in hubs like Houston, the energy industry is one of the most innovation-driven sectors in the United States and a prime candidate for the federal R&D Tax Credit under…
Maximizing Innovation Incentives: How the Orphan Drug Credit Can Outperform the R&D Tax Credit
The Orphan Drug Credit (ODC) is a powerful federal tax incentive designed to encourage the development of treatments for rare diseases, generally defined as conditions affecting fewer than 200,000 individuals in the United States. For biotechnology and pharmaceutical companies advancing therapies through clinical trials, the ODC can deliver a significantly enhanced tax benefit compared to…
Why Global Structuring and Transfer Pricing Matter for Life Sciences Companies
The life sciences industry is characterized by high-value intellectual property (“IP”), extensive research and development (R&D), complex regulatory environments, and global supply chains. Life sciences companies are increasingly global from day one where R&D is performed in one country, clinical trials in others, IP held centrally, and manufacturing and commercialization is performed elsewhere. These unique attributes create opportunity, but it also creates tax risk if global structuring and transfer pricing are not…
Related Events
Withum’s Healthcare Symposium 2026
AI Community Conference New York City
Breakfast Brief: Emerging Cyber Threats Impacting Modern Businesses
Withum’s Spring Law Firm Leadership Roundtable
Moonshots and Mop Buckets: The AI Investment Framework for Private Equity
2025 R&D Tax Credits
Tax Alert: The Refund Avalanche After Kwong
Understanding QSBS: The Most Valuable Tax Incentive for Founders
The Road Ahead for U.S. Manufacturing: 2026 Economic Outlook
From Seed to Series C: How to Build Investor‑Ready Financials
Contact Us
For more information or to discuss your business needs, please connect with a member of our team.