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Frequently Asked Questions

Listed below are some of the most frequently asked questions our team receives about R&D tax credits

What would you like to know?

Q. What are Research & Development (R&D) Tax Credits?

The R&D Tax Credit is a federal and state (most states) tax credit that can result in dollar-for-dollar reduction of taxes owed at year end or potentially against quarterly payroll taxes, for startups. Originally enacted in 1981, under the Economic Recovery Tax Act, the credit expired 8 times and extended 15 times until it was made permanent in 2015 under the PATH Act (Protecting Americans from Tax Hikes). Primarily a labor based incentive, the tax credit aims to promote further innovation by creating positive cash-flows and reducing taxes owed.


The Credit for Increasing Research Activities (the “R&D Credit”) is a government-sponsored tax incentive that rewards companies who conduct research and development in the United States and its territories. The tax credit, originally enacted in 1981 under the Economic Recovery Tax Act, was implemented to incentivize innovation throughout the economy and to keep technical jobs here in the U.S. Finally made permanent in 2015 under the PATH Act (Protecting Americans from Tax Hikes), the R&D Credit is primarily a labor-based incentive to promote further innovation by creating positive cash-flows and reducing taxes owed.


Typically, “Research and Development” implies laboratories, test tubes, and white labs coats. However, the IRS’s definition of R&D is rather broad and can be applied to many industries, including manufacturing, engineering, architecture, food & beverage, and software development.


Any business of any size can claim this tax credit if their R&D activities meet the definition of the 4-Part Test, and if the associated expenditures qualify under IRC Section 41.

Q. Does my company qualify for the R&D Tax Credit?

R&D credits can be claimed by numerous industries, including software development, manufacturing, life sciences, engineering, architecture, food & beverage, and agriculture. Any company can claim R&D credits as long as the activities meet the requirements of the 4-Part Test below:

  • Permitted Purpose: In simple terms, the purpose of the activity or project must be to create something new or improved product, process, software, invention, patent, or formula (referred to as a business component). The permitted purpose falls under a broad umbrella that includes improving functionality, performance, reliability, or quality of the business component. 
  • Elimination of Uncertainty: The activities and project in question must attempt to eliminate uncertainty related to the optimal design, development methodology, or component’s capability to achieve the permitted purpose.
  • Process of Experimentation: Substantially all of the activities constitute elements of a process of experimentation. The activities must include a systematic evaluation of alternative solutions to eliminate the technical uncertainty through, for example, trial and error or a Product Development Lifecycle (“PDLC”).
  • Technological In Nature: The activities and process of experimentation must rely on the fundamental principles of hard science, including biological sciences, computer science, engineering, physics, or chemistry.
Q. What Expenses can qualify for the R&D Tax Credit?

The Research and Development Tax Credit is also known as the “Credit for Increasing Research Activities”. As such, the more research expenses a company incurs year over year, the greater the tax credit will be. For all research costs in a given year, a company can expect anywhere from 6-20% in federal credits in addition to state credits, if applicable.

  • Wages – Wages paid to employees who conduct qualified R&D activities, as well as those employees who are directly supervising and supporting the research.
  • Supplies – Supplies and raw materials used or consumed in the R&D process, including prototyping and testing of a new or improved product, process, formulation, or patentable business component. This also includes expenses related to rental of cloud computing assets used in software development.
  • Contract Research – Payments made to a 3rd-party contractor, 1099 employee, or university for technical activities conducted on behalf of the taxpayer for technical analysis or testing, design services, and other development activities for a qualified business component.
Q. What can the R&D tax credit be used for?

The R&D tax credit is a dollar-for-dollar reduction of federal income or payroll tax liabilities. R&D tax credits can be claimed on amended tax returns which can generate cash refunds from overpayments in those years. Additionally, federal R&D tax credits roll forward for 20 years. 


For qualified small businesses (i.e. startups), these credits can be used to offset payroll tax owed to the IRS. Therefore, startups no longer need to be profitable to take advantage of the tax credits.


Most states also have an R&D tax credit available to offset various income tax, franchise tax, or sales and use tax liabilities.

Q. How much can I expect to get in R&D Tax Credits every year?

The R&D Credit is a comparative credit, which means that it will depend on the difference between current year QREs and the prior years QREs. The more research expenses a company incurs year over year, the greater the tax credit will be. Typically, a company can expect a benefit of 7-10% of the federal QREs and another 3-20% in state credits (which vary widely from state to state). 


To get a better idea of the total tax credit opportunity, use our calculator, or better yet - contact us to speak with one of our R&D experts.

Q. Can startups that are/were in losses benefit from tax credits?

Yes, the federal R&D credit can be carried back one year and forward 20 years. Each state is different when it comes to carryforward and carryback rules, but most follow the general federal guidelines.


For qualified small businesses (or QSB), the federal R&D credit can be used to offset payroll taxes owed to the IRS. Thus, startups no longer need to be in a profitable tax position to take advantage of the tax credits.


To be considered a QSB, a company must meet these requirements:

  • Less than $5 Million in gross receipts;
  • Five or fewer years of gross receipts; and,
  • Qualified Research Expenses.
Q. Which states offer R&D Tax Credits?

The definition of qualifying research activities in each state is based on the federal tax credit regulations; however, the calculation methodology varies significantly from state to state. For example:


  • Some states provide for a refund or exchange of unused R&D Credits! so that even if a taxpayer has no tax ability it can still derive a cash benefit.
  • The R&D statutes in some states have not been permanently adopted, and may expire in the future.
  • Most states require that the research activities must be conducted within their borders in order to qualify.
  • Some states do not offer the alternative simplified credit calculation.
  • In some states, basic research payments made to universities and certain non-profit organizations can be included in the calculations.


There are 38 states that currently allow taxpayers to claim an R&D tax credit. Below is the list of states that DO NOT offer an R&D Tax Credit:


  • District of Columbia
  • Missouri
  • Mississippi
  • Montana
  • Nevada
  • Oklahoma
  • Oregon
  • South Dakota
  • Tennessee
  • Washington
  • West Virginia
  • Wyoming


Check out our States Pages here (Coming soon) for more information.

Q. How does STRIKE calculate the federal and state R&D tax credits?

For the most part, STRIKE works in a 4-Step Process:


1. Preliminary Analysis (Discovery and Credit Estimation)

2. Credit Calculation

a. Qualitative Analysis: an activities-based analysis to gather and review supporting project documentation) and 

b. Quantitative Analysis: Analysis of financial documents to aggregate qualified research expenses (“QREs”) using various methods, including interviews, surveys, questionnaires, and proprietary tools.

3. Documentation and Substantiation of the Credits (deliver of an audit-ready deliverable, including package of our calculation and methods)

4. Audit Support (if the credits were to ever be challenged by the IRS or state, we stand by your side).

Depending on whether a company has previously claimed the R&D tax credit or not, our methods could vary. Also, since every R&D engagement is unique and has varying levels of complexity, some steps can be eliminated or adjusted as necessary.

Q. Can my company’s chances of Audit increase because of IRS Audits?

No. This is a common misconception among both small and medium businesses. Taking a research credit on a timely filed return, including extension, does not increase your company’s audit risk. According to IRS statistics, only 0.9% of corporate tax returns and 0.2% of small businesses (S-corp and Partnerships) are selected randomly. 


According to IRS guidelines, a return can be selected for audit based on a myriad of reasons. There is no directive that targets companies specifically who claimed R&D credits.

Q. My company does not have a dedicated research center or laboratory, can I claim credits for software development.

Contrary to public perception, businesses don’t have to have workers in white lab coats and goggles to claim R&D tax credits. Any industry that is designing or developing innovative solutions, software products, formulations, or process improvements that satisfy the 4-Part Test requirements can be eligible as a Qualified Research Expense. The R&D 4-Part Test requirements are summarized below:


Permitted Purpose: In simple terms, the purpose of the activity or project must be to create something new or improved product, process, software, invention, patent, or formula (referred to as a business component). The permitted purpose falls under a broad umbrella that includes improving functionality, performance, reliability, or quality of the business component. 


Elimination of Uncertainty: The activities and project in question must attempt to eliminate uncertainty related to the optimal design, development methodology, or component’s capability to achieve the permitted purpose.


Process of Experimentation: Substantially all of the activities constitute elements of a process of experimentation. The activities must include a systematic evaluation of alternative solutions to eliminate the technical uncertainty through, for example, trial and error or a Product Development Lifecycle (“PDLC”).


Technological In Nature: The activities and process of experimentation must rely on the fundamental principles of hard science, including biological sciences, computer science, engineering, physics, or chemistry.

Read More about Qualified Research Expenses (QREs) here.

Q. Can the R&D Tax Credit be claimed for a prior year?

Yes, the R&D tax credit can be claimed if the federal and state statute of limitations have not lapsed. For federal purposes, an amended return can be filed up to three years from the original filing date. Most states follow the same 3-year statute of limitations; however, some do differ.

Q. What activities are excluded?

The following activities are excluded from R&D tax credits:

  • Research related to arts, social sciences or humanities is not eligible for Qualified Research Expense.
  • Foreign research conducted outside the US is not eligible for Qualified Research Expense. This does not include research conducted at the Commonwealth of Puerto Rico, or any possession of the US.
  • Adaptation or duplication of existing business components and Reverse Engineering existing products, processes or software.
  • Surveys, studies, activity relating to management function/technique, market research, routine data collection, or routine testing/quality control
  • Some software developed for internal use, there are exceptions for this exclusion
  • Also research funded by any grant, contract, or otherwise by another person (or governmental entity)
Q. How much is this going to cost me?

STRIKE’s fee is success-based, meaning our client’s have no out-of-pocket costs to capture the credits. We only invoice when you reduce or eliminate current year tax due, or when you receive refunds from amended prior year returns.

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