Exploring Tax Incentives for Businesses through Research & Development Credits

Research and development (R&D) tax credits are incentives provided by the U.S. government to stimulate innovation and promote R&D activities. These credits can offer significant financial relief for businesses engaged in qualifying research projects.

To qualify for the U.S. R&D tax credit in 2025, companies must conduct qualified research within the U.S. or its territories that fits the four-part test:

Permitted Purpose: Activities must aim to improve the functionality, performance, reliability, or quality of a new or existing business component (such as a product, process, software, or technique).
Technological Uncertainty: The work must involve eliminating uncertainty related to the development or improvement of a product or process.
Process of Experimentation: R&D activities must include a systematic process of experimentation, including testing, modeling, simulation, or iterative trial and error.
Technological in Nature: The research must rely on principles of physical or biological science, engineering, or computer science.

In addition, companies must bear the economic risk of the development or improvement to claim the credits. Eligible expenses include wages, contractor payments, supply costs, and investments in product development, software, or process improvements.

To claim the credit, businesses must file IRS Form 6765, Credit for Increasing Research Activities, with their federal income tax return by the tax filing deadline. There are two main methods to calculate the credit: the Regular Credit (RC) Method and the Alternative Simplified Credit (ASC) Method, and taxpayers may select the more advantageous method annually.

Documentation is critical. Companies should keep contemporaneous records demonstrating their eligibility based on the four-part test and related expenses to substantiate claims, as these credits are subject to audit scrutiny.

Recent updates and tax law changes for 2025 include the One Big Beautiful Bill Act (OBBBA) of 2025, which restored full expensing of qualified domestic R&D expenses, allowing immediate deduction of these costs in the year they occur instead of amortizing them over five years, enhancing cash flow and tax benefit alignment. Businesses that amortized R&D costs during 2022 to 2024 may have opportunities to reclaim missed deductions under the new law.

The PATH Act (effective 2016) allows small and mid-sized taxpayers to offset Alternative Minimum Tax (AMT) liabilities with the R&D tax credit, removing a previous limitation.

Engaging with tax professionals experienced in R&D tax credits can provide additional insights and ensure compliance with relevant regulations. Accurate records of eligible expenses, such as payroll records, material costs, and overhead expenses directly associated with research and development efforts, enhance the credibility of the claim.

Maximizing benefits from R&D tax credits requires strategic planning, thorough assessment of ongoing projects, incorporating comprehensive documentation practices, and leveraging tax savings to reinvest in additional research initiatives.

Key recent developments in R&D tax credits include the expansion of qualifying expenses to include computational costs for technology, enhancement of tax credits for collaboration between businesses and educational institutions, and regional incentives aimed at promoting R&D.

Case studies on R&D tax credits provide valuable insights into how various organizations successfully leverage these incentives, illustrating the practical applications of these credits and the substantial financial benefits realized by companies engaged in qualifying activities.

[1] IRS Publication 538 - https://www.irs.gov/publications/p538 [2] IRS Form 6765 - https://www.irs.gov/forms-pubs/about-form-6765 [3] National Conference of State Legislatures - https://www.ncsl.org/research/taxation-and-fiscal-policy/research-and-development-tax-credits.aspx [4] Congressional Research Service - https://crsreports.congress.gov/product/pdf/R/R46138 [5] Tax Foundation - https://taxfoundation.org/research-development-tax-credit/

A sports equipment manufacturer could potentially qualify for R&D tax credits by developing a revolutionary new material, aimed at improving the performance and durability of sporting goods, which involves eliminating uncertainty related to the development and testing of this new material, using a systematic process of modeling and experimentation, and relying on principles of material science and engineering.
A university collaborating with a sports company on intellectual property dedicated to improving athlete performance could also be eligible for R&D tax credits, provided their research involves technologically-uncertain activities aimed at developing new technologies or techniques to enhance athlete capabilities and involves a systematic process of experimentation and relies on principles of human physiology, exercise science, or sports technology.