For companies investing in research and development activities
Estimate your potential federal R&D tax credit based on qualified research expenses. See how wages, supplies, and contractor costs translate to tax credits.
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QREs = Qualified Wages + Qualified Supplies + (Contractor Costs × 65%); Credit = QREs × 6-10%
Total Qualified Research Expenses (QREs) include 100% of qualified wages and supplies, plus 65% of contractor costs. The credit is typically 6% for startups using ASC method or up to 10% for established companies with strong base periods.
The federal R&D tax credit can provide 6-10% of qualified research expenses as a dollar-for-dollar tax credit. For a company spending $500,000 on R&D, this could mean $30,000-$50,000 in tax savings.
Qualified research must meet four tests: (1) permitted purpose (new or improved business component), (2) technological uncertainty, (3) process of experimentation, and (4) technological in nature. Software development, engineering, and product development often qualify.
Important: Since 2022, R&D expenses must be capitalized and amortized over 5 years (domestic) or 15 years (foreign) under Section 174, changing the immediate deductibility of these costs.
Tech startup with development team spending on R&D
QREs: ~$364,000 (including 65% of contractors). Estimated credit: $22,000-$36,000
Manufacturer investing in product improvement
QREs: ~$216,000. Estimated credit: $13,000-$22,000
Activities must involve developing new or improved products, processes, software, or formulas through a process of experimentation. The work must address technological uncertainty (not just business uncertainty). Routine testing, quality control, market research, and management studies do not qualify.
The IRC limits the qualified portion of contract research to 65% of the amount paid. This acknowledges that the contractor, not your company, retains some of the economic rights to the research. In-house wages and supplies qualify at 100%.
Starting in 2022, R&D expenses under Section 174 must be capitalized and amortized over 5 years (domestic) or 15 years (foreign) rather than being immediately deductible. This affects cash flow and taxable income, though the R&D credit calculation remains separate.
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