R&D Tax Credits

Qualifying activities must meet the IRS four-part test: permitted purpose (creating new or improved functionality, performance, reliability, or quality), technological in nature (relying on physical, biological, or computer sciences), elimination of uncertainty (attempting to eliminate technical uncertainty regarding development or improvement), and process of experimentation (evaluating alternatives through modeling, simulation, trial and error, etc.). Common qualifying activities include software development, product design and improvement, manufacturing process enhancement, formula development, and engineering design activities.

Companies can typically claim previously unclaimed R&D tax credits by amending returns for open tax years, generally the previous three years. The specific lookback period depends on when returns were filed and whether extensions were requested. For companies with net operating losses, there may be additional opportunities to carry forward previously unclaimed credits. Our assessment process includes evaluating historical activities to capture all available credit opportunities within applicable time limitations.

Yes, startups and pre-profit companies can benefit significantly from R&D tax credits. The PATH Act of 2015 created a provision allowing qualified small businesses to apply up to $250,000 of their R&D credit against payroll taxes (specifically the employer portion of Social Security taxes) annually. This provides immediate cash flow benefits even for companies without income tax liability. Our specialists help startups and growth companies leverage these provisions to reduce payroll tax burdens and improve cash flow.

Robust documentation should include technical descriptions of research projects, records identifying technical uncertainties and experimentation processes, time tracking for qualified employees, documentation of supplies and materials used in research activities, and contracts for outside research services. The specific documentation requirements vary based on company size, industry, and claim approach. Our process establishes appropriate documentation frameworks tailored to your specific situation and operational realities.

We use a structured approach to determine qualifying time percentages, combining interviews with technical personnel, review of project documentation, analysis of job responsibilities, and examination of time tracking records where available. For key technical employees, we typically conduct individual interviews to establish qualification percentages. For supporting groups with similar activities, we may use representative sampling combined with project documentation. Our methodology creates defensible time allocations that maximize eligible expenses while maintaining audit-ready support.

While R&D credits receive scrutiny from tax authorities, claiming appropriately documented credits for genuinely qualifying activities should not significantly increase audit risk. The key to managing risk is having thorough, contemporaneous documentation that clearly establishes qualification under IRS criteria and substantiates claimed expenses. Our documentation methodology creates strong support packages that demonstrate compliance with requirements and can withstand examination, minimizing risk while maximizing legitimate credit claims.

While software development, manufacturing, and engineering firms often claim significant credits, R&D incentives benefit companies across numerous industries including healthcare, food and beverage, agriculture, financial services, and many others. The critical factor is not industry classification but rather whether your company engages in activities to develop or improve products, processes, software, techniques, or formulas through a process of technical experimentation. Our industry-diverse expertise helps identify qualifying activities across various business types.