Maximize the Potential of the R&D Tax Credit

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Key Takeaways

  • The R&D tax credit is available to businesses across multiple industries that conduct qualified activities to develop or improve existing products and processes.
  • Many organizations meet R&D tax credit qualification criteria simply through their efforts to stay competitive.
  • Section 174 requires specialized research and experimental (SRE) expenditures to be capitalized and amortized rather than currently deducted, impacting financial reporting, tax planning, and overall business strategy.

Organizations seeking to improve products and processes or develop new ones can benefit from the R&D tax credit. R&D tax incentives are not just for technical companies or those investing heavily in R&D activities. Many day-to-day company operations potentially qualify for the R&D tax incentive. Here’s how to determine your eligibility.

What is the R&D Tax Credit?

The research and development tax credit is an incentive for companies that design, develop, and improve business components, as defined by the Internal Revenue Code (IRC). Business components can include products, processes, techniques, software, and inventions that result in new or improved reliability, functionality, quality, or performance.

Along with the federal R&D tax credit, many states also offer R&D tax incentives.

What Activities Make You Eligible for the R&D Tax Credit?

If you fall under any of the following four categories, you may be able to claim the R&D tax credit:

  • Your R&D activity is conducted on U.S. soil.
  • You’re developing or designing innovative products or processes.
  • You’re investing in improving products and processes.
  • You’re assessing or implementing new alternatives or developments within the design and development process.

What is the Four-Part Test for Qualified Activities?

To qualify for the R&D tax credit, activities must satisfy each component of a four-part test.

Permitted Purpose

The project must be the development of a new or improved product, process, or software.


  • Automating processes to increase effectiveness, efficiency, or safety.
  • Software developments designed to improve function, performance, reliability, quality, speed, security, scalability.
  • Designing building additions or new structures.
  • Design of tools, jigs, molds, fixtures, and dies.

Eliminate Uncertainty

The project must involve the discovery of information to eliminate uncertainty concerning capability, methodology, or appropriateness of design.


  • Uncertainties regarding optimal design or methodology.
  • Uncertainties regarding which programming language to use in software development.
  • Optimal building design given unique geological site constraints.
  • Developing appropriate packaging designs to reduce packaging waste or protect a product.

Process of Experimentation

Substantially all the development activity undergone during a project constitutes a process of experimentation.


  • Experimenting with alternative solutions to resolve technical uncertainties.
  • Developing applications to be functional on and compatible for iOS or Android OS.
  • Proceeding through multiple iterations of CAD designs or utilizing Building Information Modeling (BIM) systems to change unique design components.
  • Evaluating alternative machinery or machinery features to improve automated packing or processing systems.

Technical in Nature

The project must discover information that fundamentally relies on principles of the hard sciences.


  • Physical or biological sciences.
  • Computer science.
  • Mechanical or structural engineering.

R&D Tax Credit Examples:

  • You identify improvements to current products to add new functionality or improve reliability in the field.
  • You deploy new technology or make changes to your production processes to boost productivity and speed.
  • You develop new software or improve performance of client-facing technology.

Applicable expenses that can be claimed for the credit include staff salaries, raw materials, third-party contractors, and computing costs in the R&D tax credit; however, it’s always wise to consult an accountant to ensure that an activity or expense falls under the definition of research and development.

Learn how we help organizations maximize the potential of the R&D Tax Credit.

R&D Tax Credit Benefits

R&D tax incentives give companies an increase in market value, cash flow, and ROI, as well as offer organizations an immediate source of cash and reduction in current-year tax liabilities. They also provide a source of permanent tax savings and financial statement benefits.

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How Does Section 174 Affect the R&D Tax Credit?

Section 174 affects the way organizations account for R&D expenditures. Prior to 2022, Section 174 allowed taxpayers to deduct R&E expenditures fully. These include direct research expenses, like wages and supplies, and indirect research expenses, like overhead and administrative costs related to research activities.

Taxpayers previously deducted these expenses in the year they were incurred. The Tax Cuts and Jobs Act of 2017 amended Section 174 to require SRE expenditures in tax years beginning after December 31, 2021, to be capitalized and amortized rather than currently deducted.

The amortization of SRE expenditures impacts financial reporting, tax planning, and overall business strategies.
  • Operating Income

    Operating income is a key metric for assessing an organization’s operational efficiency and profitability. With R&D expenses being amortized over time, organizations must now allocate a portion of R&D costs to each reporting period.
  • Cash Flow Projections

    Cash flow projections are crucial for financial planning and decision making. As R&D expenses are amortized, cash outflows are spread over the amortization period. Companies need to consider the timing of R&D amortization payments when projecting cash flows.
  • Year-End Tax Planning

    Year-end tax planning involves optimizing R&D credits. Companies must plan for the impact of R&D amortization on their tax liability. Some companies may choose to accelerate R&D deductions to reduce taxable income.

Work with a Trusted Advisor

Eide Bailly helps clients identify qualifying activities and quantify expenditures to determine available R&D tax credits and maximize the full potential of the credits. Our R&D team can also help organizations with the Section 174 reporting requirements. Our focused knowledge and understanding of the current tax laws and regulations allows us to help clients meet their overall goals, while managing their tax liabilities.

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