A Small Business Guide to the R&D Tax Credit: Turn Your Everyday Innovation into Tax Savings
Think R&D tax credits are just for big companies with research labs? Think again. If your business is solving problems and improving products or services, you could be leaving serious money on the table.
What is the R&D tax credit?
Back in 1981, the government created the R&D tax credit (also called the Research and Experimentation credit) to reward American innovation. Here's the best part — it lets you take up to 20% of your qualified research expenses right off your tax bill. Unlike deductions that just reduce your taxable income, this credit cuts your taxes dollar-for-dollar.
What expenses count?
The credit covers all kinds of research-related costs, including:
The salaries of employees working on innovative projects.
Materials and supplies used for research and development.
Outside contractors helping with research.
Cloud computing costs for research activities.
Computer equipment rental used for R&D work.
The four-part test
The IRS needs your research activities to check four boxes:
New or improved business components: You need to be working on improving 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 some question about whether you can achieve your goal, what method will work best, or what the right design is. If you're scratching your head about how to make something work better, you might qualify.
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.
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, you can even use this credit against your payroll taxes — up to $250,000 each year for five years.
Keep thorough records of:
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.
Common misconceptions
Many small business owners mistakenly believe they don't qualify because:
They're too small (nope — size doesn't matter).
Their work isn't groundbreaking enough (it doesn't need to be).
They don't have scientists in lab coats (not required).
Their project didn't succeed (doesn't matter — it's about the attempt).
How Archer Lewis can help
Navigating the R&D tax credit can be tricky. Our team can:
Look at your business activities to spot qualifying work.
Add up your research expenses correctly.
Help you gather the right documentation.
Handle the paperwork.
Find other tax credits you might be missing.
Our team knows exactly what the IRS is looking for and can help you claim every dollar you deserve. We'll also keep an eye out for other tax-saving opportunities in your business.
Learn how we can help turn your problem-solving efforts into tax savings.