Research & Development Study

R&D Tax Credit Study

If you’re a business that invests in innovation, you could be missing out on a tax benefit. The Research and Development (R&D) Tax Credit can help companies capture significant savings by offering cash back for a portion of qualifying expenditures. For eligible small businesses, the credit may also be used to offset up to $500,000 in payroll taxes annually, creating a valuable cash flow opportunity even for companies that are not yet generating taxable income.

The permanent R&D tax credit lets business owners incorporate this tool into their long-term tax minimization strategies, but many company leaders don’t realize they may qualify or that the credit is not limited by industry, size, or revenue. At Mowery & Schoenfeld, our tax experts help quantify your potential R&D tax credit opportunity, identify qualified activities, and document the corresponding Qualified Research Expenditures needed to support and maximize your credit.

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R&D Tax Credits: What OBBBA Means for Your Business >

Why Perform an R&D Tax Credit Study

The R&D tax credit study process can be complex, especially as rules and documentation expectations continue to change. A study helps confirm whether your business qualifies, identifies the expenses that may be eligible, and shows the potential dollar-for-dollar value of the credit. In general, the R&D tax credit is often worth about 6% to 8% of Qualified Research Expenditures, though the actual benefit depends on the facts and expenses specific to your business.

Working with experienced tax strategy professionals can make the process easier by helping you understand what activities qualify, what records you need, and how to support the credit if questions come up later. Our CPAs ensure your reporting is accurate and compliant while maximizing your tax benefits. We can also help you amend prior returns to claim any missed R&D credits.

Which Businesses Should Consider an R&D Study?

The tax credit is available for organizations in many sectors, including manufacturing, distribution, and software development. If your business engages in certain activities that develop new or improve existing products, software, processes, techniques, and formulas, an R&D tax credit study may be beneficial for you. Many of our clients have improved cash flow through this tax credit, often seeing meaningful tax savings compared to the cost of the study.

What is the Process for an R&D Study?

Our research and development analysis typically begins with initial discussions to understand your business, your R&D activities, and how the credit may apply. From there, we help educate your team on the credit, begin gathering documentation, and conduct interviews or questionnaires as needed.

Throughout the process, our team works to complete the study accurately, efficiently, and with minimal disruption to your business.

Phase 1: Documentation and Information Gathering

After our initial discussions, we review the information needed to understand your research activities and related expenses. This may include identifying potential projects, departments, and business activities where Qualified Research Activities may have occurred.

Qualified Research Expenditures, or QREs, may include employee wages tied to R&D activities, along with certain supplies, contractor costs, and other eligible expenses.

We also review available documentation that can help support the credit, such as project records, payroll details, supply costs, contractor expenses, and other relevant materials. We can provide recommendations for how to classify research-related expenses in your financial records and tax return workpapers.

Next, we work with your team to collect additional details about the projects and departments involved in research activities. This phase may include interviews, written questionnaires, and follow-up conversations to better understand how your team develops or improves products, processes, software, techniques, or formulas.

We use this phase to educate your CFO or other leaders on which activities and expenses may qualify for the research tax credit, so your team is better prepared to support the study and find future opportunities.

Phase 2: Tax Analysis

Our team reviews the activities and expenses to determine what qualifies under applicable federal and state R&D tax credit rules. We calculate the potential tax credit and provide recommendations for internal documentation to help support the credit claimed.

As part of the final report, we also include detailed support for the calculation, such as completed time surveys from employees and independent contractors when applicable. These records help document the research activities and expenses used to calculate the R&D tax credit.

The result is a clear analysis designed to help your business maximize available tax benefits while maintaining accurate and supportable reporting.

Why Choose Mowery & Schoenfeld for Your R&D Tax Credit Study

Our proactive and personalized approach to tax planning, diverse expertise, and 30 years of service make our team uniquely qualified to find all qualified research expenses, maximize your tax benefits, and give you peace of mind.

Common R&D Credit Questions Businesses Ask

What are the new rules for the R&D credit?

OBBBA did not change the R&D tax credit rules, but it did update the treatment of certain Section 174 research and experimental expenditures. Businesses should understand how those Section 174 changes may affect their broader tax planning while continuing to evaluate R&D credit eligibility based on qualified activities and expenses.

An R&D tax credit study can help determine whether your business qualifies, estimate the potential benefit, and document the activities and expenses needed to support the claim. Unused R&D tax credits may also be carried forward for up to 20 years, which can help businesses benefit from the credit in future tax years if they cannot use the full amount right away.

How does the 80% “substantially all” rule apply to R&D tax credits?

For purposes of the R&D tax credit, the 80% “substantially all” rule under Reg. Sec. 1.41-4(a)(6) generally looks at whether at least 80% of a business component’s research activities involve a process of experimentation. A separate substantially all rule under Reg. Sec. 1.41-2(d) applies to employee wages and helps determine whether wages paid for qualified services can be included in the credit calculation.

What is the four-part test for R&D tax credits?

To qualify for the R&D tax credit, the activity generally needs to meet four requirements, also known as the four-part test. 1) The activity needs to have a permitted purpose, meaning it is intended to improve functionality, performance, reliability, or quality. 2) It also needs to be technological in nature, so the work should rely on principles of engineering, computer science, physical sciences, or biological sciences. 3) The taxpayer must demonstrate that they have attempted to eliminate uncertainty about the capability, method, or design of a process or product. 4) Finally, the activity should involve a process of experimentation, such as testing, modeling, trial and error, evaluating alternatives, or refining a solution.

How do you claim the R&D credit?

To claim the R&D tax credit, businesses generally file Form 6765 with their annual tax return.

What expenses qualify and do not qualify for the R&D credit?

Not every research expense qualifies for the R&D tax credit. An R&D study helps determine when expenses incurred related to a product or process design meet the requirements for the credit. Examples of qualifying and non-qualifying expenses include:

Qualified expenses: Direct research wages such as employees conducting laboratory experiments, direct supervision or support, supplies, third-party research expenses, and cloud-computing or computer rental costs.
Non-qualified expenses: Quality control testing, efficiency surveys, management studies, consumer surveys, advertising and promotions, duplication of existing products or processes, aesthetic changes, research outside the U.S., and funded research.

Does the R&D project need to be successful or completed to qualify?

An R&D project does not need to be successful, completed, or result in a commercial product to qualify for the federal R&D tax credit. What matters is whether the company undertook a process of experimentation to eliminate technical uncertainty and attempted to develop or improve a product, process, software, technique, formula, or invention.

Have M&S Complete Your R&D Credit Study

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