How To Claim The Research & Development Credit On Your Taxes

If your business invested in developing or improving a product, process, software, or technology, you may qualify for the federal Research & Development (R&D) Tax Credit.

Claiming the credit can be complicated, but understanding the eligibility requirements, documentation, and filing process can help you maximize your tax savings.

In this guide, we’ll explain who can claim the R&D tax credit, what records you’ll need, which IRS forms to file, and how to properly claim the credit on your tax return.

What Is The R&D Tax Credit? The Quick Answer

The Research & Development (R&D) Tax Credit is a federal tax credit available to eligible businesses that invest in qualified research activities. The credit can reduce a business’s federal income tax liability and, in some cases, offset Alternative Minimum Tax (AMT) or the employer’s share of payroll taxes.

How To Claim The R&D Credit On Your Taxes

Claiming the R&D tax credit involves determining your eligibility, calculating your credit, completing the required IRS forms, and filing them with your federal income tax return.

Step 1: Confirm Your Eligibility

Before claiming the credit, make sure your business qualifies. Eligible businesses must conduct qualified research activities that meet the IRS’s four-part test:

• Permitted purpose
• Elimination of uncertainty
• Process of experimentation
• Technological in nature

Because the eligibility rules can be complex, consider consulting a CPA or tax professional if you’re unsure whether your activities qualify.

Step 2: Gather Your Documentation

The IRS requires businesses to maintain documentation supporting their qualified research expenses. Depending on the type of expenses you’re claiming, your records may include:

• Invoices, receipts, and purchase orders
• Payroll records and employee timesheets
• General ledger and accounting records
• Contracts and invoices for qualified third-party research

Keeping detailed records throughout the year makes calculating and substantiating your credit much easier.

Step 3: Determine Which Method You’ll Use To Calculate R&D Expenses

There are two methods for calculating the R&D tax credit: the Regular Credit method or the Alternative Simplified Credit (ASC) method. The IRS recommends that businesses claiming the R&D tax credit calculate the credit using both methods to determine which is best.

Calculating The Regular R&D Tax Credit

To calculate the Regular Credit, start by using IRS Form 6765, Credit for Increasing Research Activities. For the Regular Credit, you will complete Section A of the form. Using your records, you will add the following to the form:

• The amount paid or incurred to energy consortia
• Basic research payments to qualified organizations
• Qualified organization base period amount
• Wages for qualified services
• Supply costs
• Rental or lease costs of computers
• Contract research expenses
• Fixed-base percentage
• Annual gross receipts

With this information, you can walk through each step of Section A of Form 6765 to calculate your R&D credit.

Calculating The Alternative Simplified Credit

If you opt to use the ASC Method or you’re using both calculations to compare which yields the higher tax credit, skip Section A and move on to Section B of Form 6765.

In Section B, you’ll need the following information:

• The amount paid or incurred to energy consortia
• Basic research payments to qualified organizations
• Qualified organization base period amount
• Wages for qualified services
• Supply costs
• Rental or lease costs of computers
• Contract research expenses
• Total qualified research expenses for the prior three tax years

While this information is very similar to the figures needed for the Regular Credit calculation, there are some notable differences. Specifically, you will not need to enter your annual gross receipts, and you also aren’t required to calculate the fixed-base percentage.

Once you have all of your information, work through Section B to calculate the amount of your R&D credit.

Step 4: Complete Form 6765

Once you’ve calculated your R&D tax credit, complete IRS Form 6765. Complete Section A if you’re using the Regular Credit method or Section B if you’re using the Alternative Simplified Credit. Most businesses will also complete Section C to report the current-year credit, while businesses making the payroll tax election must also complete Section D.

Step 5: Submit Tax Forms & Documentation To The IRS

Once you’ve completed Form 6765, attach it to your federal income tax return and file it with the IRS by your applicable tax filing deadline. If you’re claiming the R&D tax credit for a prior year, you may be able to amend an eligible return to claim the credit retroactively.

How To Claim The R&D Credit To Offset Alternative Minimum Tax

Eligible small businesses may be able to use the R&D tax credit to offset Alternative Minimum Tax (AMT). To qualify, your business must:

• Conduct qualified research activities that meet the IRS requirements.
• Be a partnership, sole proprietorship, or privately held corporation.
• Have average annual gross receipts of $50 million or less for the three tax years preceding the credit year.

Businesses with a tax liability exceeding $25,000 generally can’t use the credit to offset more than 75% of their tax liability.

How To Apply The R&D Credit Against Payroll Tax

Qualified small businesses may be able to use a portion of their R&D tax credit to offset the employer’s share of Social Security taxes. To qualify for the payroll tax election, your business generally must:

• Have less than $5 million in gross receipts for the current tax year.
• Have no gross receipts before the five-tax-year period ending with the current tax year.

Eligible businesses can apply up to $250,000 of the R&D tax credit toward payroll taxes each year (subject to IRS limits).

 Step 1: Complete IRS Form 6765

Complete IRS Form 6765 as you normally would to claim the R&D tax credit. In addition to completing Section A or B and Section C, you’ll also complete Section D to make the payroll tax election. Attach Form 6765 to your federal income tax return and file it by your applicable tax filing deadline.

Step 2: File IRS Form 8974

After making the payroll tax election, complete IRS Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. Use information from Form 6765 and your employment tax return (such as Form 941, 943, or 944) to calculate the amount of credit you can apply for the tax period. Attach Form 8974 to your employment tax return when filing with the IRS.

How To Claim The R&D Tax Credit For Prior Tax Years

If you didn’t claim the R&D tax credit in a previous tax year, you may still be able to claim it by filing an amended federal income tax return for an eligible open tax year.

Along with your amended return, the IRS generally requires additional documentation to support your claim, including:

• The business components for which you’re claiming the credit
• The qualified research activities performed for each business component
• The individuals who performed the research activities
• The information each individual sought to discover
• The qualified employee wage, supply, and contract research expenses included in the claim

Because amended R&D credit claims have specific documentation requirements and filing deadlines, consider working with a CPA or tax professional to ensure your claim is complete and accurate.

When To Hire A Professional To Claim The R&D Tax Credit

The R&D tax credit can be valuable, but determining eligibility, calculating qualified research expenses, and completing the required IRS forms can be complicated. Consider working with a CPA or R&D tax credit specialist if:

• You’re unsure whether your research activities qualify.
• You need help calculating qualified research expenses.
• You want to claim the payroll tax election or offset Alternative Minimum Tax (AMT).
• You’re filing an amended return to claim the credit for a prior tax year.
• Your business has a complex tax situation or multiple qualifying projects.

An experienced tax professional can help you determine your eligibility, maximize your available credit, maintain the documentation required by the IRS, and ensure your claim is filed accurately.

The Bottom Line On Claiming The Research & Development Credit On Your Taxes

The R&D tax credit can provide significant tax savings for businesses that invest in developing or improving products, processes, software, or technology. While determining eligibility and calculating the credit can be complex, taking the time to understand the requirements can help ensure you receive the full tax benefit you’re entitled to.

Don’t qualify for the R&D tax credit? Don’t worry — there are other ways to put money back in your pocket. You may qualify for the Work Opportunity Tax Credit, which gives as much as $9,600 per eligible employee. For other money-saving tax opportunities, check out our other content or consult with your attorney or tax professional.