Many of your clients qualify for the R&D tax credit and don't know it. Here's a practical guide for accountants on which industries, activities, and companies are eligible.
Tax credits are one of the few places in the code where the government writes checks for work you were going to do anyway. The trick is knowing which ones apply and how to claim them without burning a quarter on paperwork. This guide walks through the Research & Development tax credit — what it is, who qualifies, and how Staxiom helps founders capture it on autopilot.
What is the R&D tax credit?
The R&D credit is a dollar-for-dollar federal tax credit designed to reward companies that invest in building or improving their products, processes, software, formulas, and techniques. If your team is making something work better — faster, more reliable, more functional, higher quality — the costs that go into that effort can usually be turned into a credit.
It's available federally and in 38 states. Traditionally it offsets income tax, but qualified startups can apply the federal credit against payroll taxes for up to five years, which is what makes it so valuable to pre-revenue companies.
If you're a Staxiom customer, our platform handles eligibility, calculation, documentation, and filing in one place — so the credit shows up on your next payroll run instead of a year from now.
How to determine if your business is eligible
The IRS uses a four-part test to decide whether an activity qualifies. Two ground rules before we dig in: the work has to happen inside the United States, and marketing or sales activities don't count, no matter how creative they are. If a project clears all four parts below, it's likely qualified.
Part 1: A permitted purpose
The activity has to be aimed at creating or improving a "business component" — a product, process, software, formula, technique, or invention that ties back to what you sell or how you operate. The bar is lower than people think. The component doesn't have to be physical, the result doesn't have to be perfect, and you don't have to be first to market. You just have to be making your own thing better in terms of function, performance, reliability, or quality.
Part 2: Eliminating uncertainty
At the start of the project, there has to be real technical uncertainty — about whether the result is achievable, how to achieve it, or what the right design is. If your team had to figure something out, rather than look it up or follow a known recipe, that's the kind of uncertainty the IRS is talking about. And the work counts whether it ultimately succeeds or not.
Part 3: Technological in nature
The work has to lean on a hard science: computer science, engineering, physics, chemistry, biology, electrical engineering, and so on. You don't need to call yourself a tech company. Beauty brands developing sustainable packaging, apparel companies engineering new materials, agencies building their own analytics tools — all fair game, as long as the underlying work is grounded in a hard science. For software specifically, the work generally needs to push past what's commercially available and carry real economic risk.
Part 4: A process of experimentation
You have to be evaluating alternatives in some structured way — modeling, simulation, prototyping, systematic trial and error, testing, refining. Most software teams accidentally do this every day. Shipping, measuring, iterating, breaking things, fixing them: that's a process of experimentation, and it counts even when the experiment fails.
The credit exists to reward the attempt, not just the win. You have to clear all four parts of the test, but you don't have to land every project to qualify.
Which costs qualify for the R&D tax credit?
Once an activity passes the four-part test, the expenses tied to it become eligible. The main categories:
- Wages for employees who perform, supervise, or directly support qualified R&D work. For most software companies, this is the biggest bucket by far.
- Supplies consumed in the R&D process — physical materials used to build, test, and iterate.
- Cloud and computing costs used to host development, staging, or testing environments for software being built.
- Contract research performed by U.S.-based contractors on your behalf, where you bear the financial risk (you can claim 65% of those payments).
The shorthand: qualified expenses spent on qualified activities equal qualified costs.
Which costs do not qualify?
A few common buckets that don't make the cut:
- Research performed outside the United States
- Work done by a third party where you don't own the rights or didn't pay for it
- Market research, focus groups, and customer surveys
- Employee training
- Routine troubleshooting and maintenance
- Custom work tailored to a specific customer's order
- Legal fees, including patent filing costs
- Reverse engineering
How to claim the credit
The mechanics, in order:
- Document everything as you go. Project notes, technical narratives, payroll records, expense detail, lab or test results, and communications about the work. Contemporaneous documentation is what carries the day in an exam.
- File Form 6765, Credit for Increasing Research Activities, with your federal income tax return.
- If you're a qualified small business electing the payroll offset, file Form 8974 once the credit is approved. Form 8974 attaches to your quarterly Form 941, which is where the actual payroll tax reduction gets applied.
State credits are filed separately and the rules vary considerably, so it's worth running both layers in parallel.
Why this matters for startups and small businesses
The 2015 PATH Act expanded the credit so that pre-revenue startups — companies with less than $5 million in gross receipts in the current year and no more than five years of gross receipts which includes the current year for which the credit is being claimed — can apply it against the FICA portion of payroll taxes instead of income tax. The cap is up to $500,000 in credit per year.
In practice, this means a startup with no income tax liability can still generate a six-figure credit and start drawing it down on the very next payroll cycle after filing. For an early-stage company, that's runway — real cash, not a deferred tax asset sitting on a balance sheet.
Misconceptions worth clearing up
"You need to be paying income tax to claim it." Not true. Qualified startups can use the credit against payroll taxes, and many states offer the credit independent of income tax status.
"You need to be doing groundbreaking science." Also not true. You just need to clear the four-part test. Improvements to your own product count.
"You need a formal R&D department." Nope. The work is what matters, not the org chart.
"AMT blocks us from claiming." Since 2016, certain small businesses (non-publicly traded, average revenue under $50M) can offset AMT and other tax with the R&D credit.
Risks of claiming the credit
Like any tax credit, the R&D credit can be examined. If the IRS reviews a return and finds the claim isn't supported, they can disallow some or all of the credit. In some cases, penalties and interest can apply to credits that were already taken. The defense is documentation: a clean, contemporaneous paper trail tying expenses to qualified activities. This is the part most generalist providers underinvest in, and it's the part Staxiom is built around.
Frequently asked questions
I qualified in prior years but never claimed. Is the credit retroactive? Yes. At the federal level you can generally claim back three years. Some states allow longer lookbacks.
Does my company have to be profitable to use the credit? To use it against income tax, yes — but the federal credit can be carried forward for up to 20 years, so unused credits sit there waiting until you're profitable. And qualified startups can bypass profitability entirely by applying the credit to payroll taxes.
What if our R&D effort failed? You're still eligible. The credit rewards the work, not the outcome.
Federal or state credit? Both. The federal credit is available nationwide; 38 states layer their own R&D credit on top of it.
Does the improvement have to be new to the industry? No. It just has to be new to your company.
How Staxiom fits in
We built Staxiom because the R&D credit shouldn't take a six-week consulting engagement and a stack of spreadsheets to claim. Our platform connects to your payroll, accounting, and engineering systems, identifies qualifying activities and expenses automatically, generates the technical documentation, and produces a filing-ready study — reviewed by real tax professionals.
If you want to see what your credit could be worth, get a credit quote. It takes a few minutes and there's no commitment.
This article is for general information and isn't tax advice. Rules change and vary by industry and location — talk to a CPA or tax advisor about your specific situation.
