Does your business qualify for an R&D tax credit? Get the rundown on eligibility requirements and how to get started
- If your business engages in certain qualified research activities, you may be eligible for a Section 41 R&D tax credit or Section 174A tax deduction.
- R&D tax credits and incentives can help you reduce your tax burden and make your business more profitable, but you’ll have to satisfy strict qualifying requirements like the four-part test and provide documentation to back up your claims.
- Work closely with your tax advisor to identify research activities that may qualify for an R&D tax credit or deduction, document those activities and apply for incentives.
Businesses that engage in research typically qualify for valuable tax incentives. These include the Section 41 R&D tax credit and the ability to write off certain research expenses under the Section 174A R&E deduction.
Using these tax provisions can help make your research activities significantly more cost-effective by reducing your tax burden. Keep reading to learn more.
What are the top R&D tax credits and incentives?
There are three major tax incentives available to businesses that conduct research. These incentives work together to help lower your overall cost of research:
- Section 41: This is an immediate, nonrefundable R&D tax credit that you can claim for certain qualified research activities. Because it is nonrefundable, it can help reduce your tax bill but won’t generate a payment from the IRS.
- Section 174: This deduction requires you to capitalize and amortize the cost of foreign R&E activities over 15 years.
- Section 174A: Under Section 174A, your business can immediately expense domestic research and experimentation costs, although you also have the option to capitalize and amortize them over time. This new rule is effective as of 2025, with businesses earning under $31 million in gross revenue also eligible to retroactively claim this deduction for 2022-2024.
How do R&D tax credits work for U.S. businesses?
R&D tax credits and incentives are designed to make it cheaper for businesses to conduct research. U.S. businesses will often use more than one of these incentives as part of their tax strategy.
For example, a pharmaceutical company based in Chicago could potentially claim both the Section 41 R&D tax credit and an immediate tax deduction under Section 174A. This could help dramatically lower its tax liability for a given year.
However, when claiming both Section 41 and Section 174A, you must subtract the value of your Section 41 credit from your deduction or claim a reduced research credit. The reduced research credit takes a 21% haircut, but doesn’t require a decrease in the section 174A deduction.
Who qualifies for R&D tax credits?
If your U.S. company does any kind of original research, it may be able to benefit from an R&D tax incentive. Industries that typically lean on R&D incentives include tech, pharmaceutical, architect and engineering firms, manufacturing and even certain agricultural businesses.
How do you determine eligibility for R&D tax credits?
Your business will need to meet certain eligibility requirements to qualify for the Section 41 R&D tax credit or a deduction under Section 174. These include conducting qualifying research activities and, for Section 41, meeting what’s called the four-part test.
Common activities that meet R&D tax credit qualifications
Any research developing a new product, process or technique may qualify for the Section 41 R&D tax credit or Section 174A deduction. This includes not only areas you might expect, like software, robotics or prescription drug development, but also some that might surprise you, like an agricultural company finding new ways to grow or process food.
Section 41 R&D tax credit requirements: The four-part test
To claim the Section 41 R&D tax credit, you pass what is known as the four-part test to determine whether your research activities qualify for the credit. The four parts include:
- The Section 174A test: Your research activity must qualify for Section 174A by representing a business activity and an expense that is research or experimental in nature.
- The discovering technological information test: Your research must be grounded in hard sciences like physics, biology or chemistry with the purpose of discovering new technological information.
- The business component test: Your research must be focused on developing a new business component, like a product, process or technique.
- The process of experimentation test: Your activities must be part of a process of experimentation involving testing multiple options to improve the function, performance, reliability or quality of a business component.
How do you qualify for R&D tax credits?
To qualify for the Section 41 R&D tax credit or Section 174A, you will need to identify eligible projects and activities and document your work and expenses. Note that Section 41 is more restrictive than Section 174A, meaning that while research activities that qualify for Section 41 will also qualify for Section 174A, the reverse is not always true.
Identifying eligible projects and activities
You’ll need to identify whether your research activities qualify under IRS guidelines. This may include determining whether an expense is research or experimental in nature under Section 174A and whether it qualifies for Section 41 by meeting the four-part test.
R&D tax credit guidelines for documenting development work and expenses
To claim the Section 41 R&D tax credit or a 174A deduction, you’ll need to provide documentary evidence that your activities meet qualification guidelines. Ideally, this should include scientific documentation like lab notes, test results, meeting minutes and design data. Support financial records are also valuable.
Essentially, you need to be able to establish a clear narrative to show the IRS that you engaged in a qualified research activity.
How do you claim R&D tax credits?
To claim the Section 41 R&D tax credit or a tax deduction under Section 174A, you’ll need to complete Form 6765 as part of your business’s tax return and provide supporting documentation. Here are key steps to successfully completing this process:
1. Talk to your tax advisor
Ask your tax advisor to help you determine which of your research activities may qualify for R&D tax incentives. Your advisor can help you identify qualified activities and establish a documentary narrative to support your assertions.
2. File Form 6765
Working with your tax advisor, complete Form 6765 to file for R&D tax incentives, document your research expenses and prove to the IRS that you engaged in qualified research.
3. Explore related opportunities
Your tax advisor may also be able to point you toward additional related tax opportunities. These include a payroll tax offset or the ability of certain businesses with under $31 million in gross revenue to claim Section 174A retroactively for 2022-2024.
How Wipfli can help
We advise your business on claiming valuable tax credits and incentives. Let’s talk about how we can help you identify and qualify for incentives like Section 41 or Section 174 that can make your business more profitable. Start a conversation.
