This article was originally written in November 2024 and has since been updated with new discoveries and research in 2025.
If your business is solving problems or improving products, you might be qualified for a hefty tax break: the R&D tax credit. This tax credit (also called the Research and Experimentation credit) is not only for tech giants or scientists—it’s also accessible to small businesses across many industries.
However, innovation in small businesses often goes unrecognized and underutilized when it comes to tax savings.
But it’s true: if your business is designing, developing, or improving something, you could take up to 20% of your qualified research expenditures right off your tax bill with the R&D tax credit, reducing your tax liability and freeing up capital for growth.
This article covers everything you need to know about the R&D tax credit, including who qualifies, how it works, and why it matters.
What is the R&D tax credit?
The research and development tax credit is a federal research incentive designed to reward businesses investing in innovation. Known formally as Internal Revenue Code section 41, this credit encourages companies to develop new products, improve existing ones, and enhance technologies. It’s not only reserved for tech or science firms but is available based on activity, not business sector.
Unlike deductions, which just reduce your taxable income, this credit is a dollar-for-dollar reduction. It can either help reduce your income tax or your payroll tax, depending on your company’s tax status.
Keep in mind that this is a permanent tax credit, not a one-time benefit.
Who qualifies?
Not sure if you qualify for the R&D tax credit? You’re not alone—data reveals that less than 30% of businesses that qualify for this credit actually claim it.
Small businesses are usually the ones that leave money on the table.
First, know that companies do not need a formal R&D department to qualify, and you don’t need to be a tech startup. This tax credit is flexible, and various activities can go towards it. This includes both basic research and applied research activities.
If you’re not sure if your business qualifies, ask yourself these questions:
- Are you improving a product or service?
- Are you experimenting with new materials or processes?
- Are you developing custom software or workflows?
If the answer is “yes,” you might indeed qualify. While businesses in a broad range of industries can be eligible, common sectors include construction, food and beverage, manufacturing, and SaaS.
What expenses can be claimed?
The R&D tax credit covers all kinds of research-related costs.
Common small business expenses that are eligible might include:
- Wages: Employees working directly on qualified research expenses and activities, such as innovative projects or directly supervising qualified research efforts.
- Supplies: These are used for prototyping or testing, such as materials used for research.
- Contractors: Up to 65% of costs for third-party research contributors.
- Cloud computing: If used to develop or test new products or processes.
- Equipment rental: Computer equipment rented for R&D work.
Get this: even partial involvement in innovation could make these expenses count, especially when looking at qualified research expenditures incurred throughout your projects.
The four-part test
How does the IRS determine if your business qualifies?
Your research activities need to check four boxes:
- New or improved business components: You need to improve your products, processes, or software—even small improvements count. Maybe you’re tweaking your manufacturing process to be more efficient or updating your software to work better.
- Technological in nature: Your work should involve science, engineering, or computer principles. Don’t worry—you’re not trying to win a Nobel Prize here. Using technical knowledge to solve everyday business problems often qualifies.
- Technical uncertainty: There needs to be questions about whether you can achieve your goal, what method will work best, or the right design. You might qualify if you’re scratching your head about how to make something work better.
- Process of experimentation: You need to show you’re trying different approaches through testing, trial and error, or modeling. It’s about finding what works through experimentation.
By understanding and applying the four-part test, your business can confidently identify which projects and activities may qualify for valuable tax credits.
Remember, even small improvements or experimental efforts can lead to substantial tax savings, so don’t overlook the innovation in your everyday operations.
How much can you actually save?
The R&D tax credit is one of the largest tax subsidies, according to the federal government, which businesses use to save billions of dollars a year collectively. So, how much can your individual business save?
Of course, that depends on your exact business. The specific formula involves calculations of qualified research expenses over a certain period of time.
Two different methods were used: the regular research credit calculation (RRC) method and the alternative simplified credit (ASC) method. The RRC requires gross receipts and can be complex (but might result in a larger credit), while the ASC is more streamlined (which makes it accessible and a good choice if you lack enough historical data).
The money you save from this tax credit can be far more than just some pocket change, even if your team is small. For example, let’s say you’re a small food manufacturer experimenting with eco-friendly packaging.
You’ve invested in materials testing, worked with engineers to refine the design, and run trial productions. These activities could qualify you for the R&D tax credit, potentially saving your business $10K or more.
Even startups with no taxable income may still benefit from taking this business tax credit through the payroll tax election. While the maximum amount of payroll tax research credit used to be $250,000, it doubled to $500,000 for tax years beginning in 2023 and beyond.
Debunk common myths that prevent people from applying
Many small business owners mistakenly believe they don’t qualify for the R&D tax credit, so they don’t even apply. And with potential tax hikes on the horizon, maximizing available credits becomes even more essential.
Here are common myths that often hold business owners back:
- Myth: “Our business is too small.”
- Truth: Nope, size doesn’t matter.
- Myth: “We’re not a tech company.”
- Truth: Innovation shows up in everyday problem-solving.
- Myth: “It’s too complex to apply.”
- Truth: The process can be smooth and worthwhile with the right advisor.
By clearing these common misconceptions, small business owners can better recognize the hidden opportunities within their operations.
Don’t let myths hold you back—with the right guidance, claiming the R&D tax credit can become a straightforward and rewarding step toward reducing your tax liability and fueling future innovation.
How to claim the credit
Small businesses can claim this credit using Form 6765 with their tax return. If you’re a startup or small business making less than $5 million annually, remember, you can even use this credit against your payroll taxes—up to $500,000 yearly for five years.
Be sure to clearly outline your qualified research activities, including:
- Project documentation and test results.
- Notes about your research activities.
- Time records for employees doing the research.
- Supply and contractor costs.
- Project meetings and relevant emails.
- Any patent paperwork.
The process then involves identifying qualified activities, tracking eligible expenses, calculating the credit, and filing the appropriate forms.
Why work with a trusted advisor like Archer Lewis?
The R&D tax credit can offer substantial savings — but only if it’s claimed correctly. It takes more than just filling out a form. You need to gather the right documentation, meet IRS requirements, and apply the right calculations to avoid leaving money on the table.
That’s why working with a knowledgeable advisor matters. At Archer Lewis, we help small businesses navigate these complexities with confidence. Our team proactively identifies eligible activities, organizes documentation, handles year-end tax planning, and ensures your claims are accurate and compliant, so you can focus on running your business while we handle the details.
Don’t Leave Tax Savings on the Table
If you’re running a small business — whether you lead a dental practice refining treatment methods, manage an HVAC company improving energy efficiency, or operate a construction firm testing sustainable materials — your everyday innovations could qualify for meaningful tax savings through the R&D tax credit.
The key is knowing what counts and making sure you claim it correctly. That’s where Archer Lewis comes in. We’re not just here for tax season. We’re your year-round partner, helping you uncover hidden opportunities, organize the right documentation, and stay fully compliant so you can focus on growing your business.
Want to explore whether your business qualifies?
Connect with a trusted Archer Lewis advisor today to discuss how we can help turn your innovations into real tax savings and strengthen your financial future.
