The R&D credit rewards businesses for developing or improving products, processes, software, formulas, or techniques through work that is technological in nature and involves eliminating uncertainty via a process of experimentation. Qualifying expenses include wages of engineers and developers, supplies consumed in development, and a percentage of contract research. The credit is a dollar-for-dollar reduction of tax, typically 6% to 10% of qualified spending under the simplified method. Startups get a standout feature: qualified small businesses (under $5 million of gross receipts and within five years of first revenue) can apply up to $500,000 of credit per year against employer payroll taxes, turning the credit into cash flow before profitability. The 2025 tax legislation also restored immediate expensing of domestic research costs, unwinding the amortization requirement that had inflated taxable income for R&D-heavy companies since 2022. Contemporaneous documentation of projects and experiments is what sustains the credit on exam.
Research and Development (R&D) Credit
Primary authority: IRC §41; Form 6765
The authority behind it
IRC §41; Form 6765
Every entry in this glossary cites the statute, regulation, or IRS guidance behind it.
Worked example
A pre-revenue software startup pays $800,000 in developer wages on new architecture work. It claims roughly a $64,000 credit and elects to apply it against payroll taxes, recovering cash every quarter despite having no income tax to offset.
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