The Research and Development (R&D) tax credit offers businesses an opportunity to claim tax benefits for certain qualifying expenditures. By understanding what expenses are eligible, companies can maximize their benefits. The R&D tax credit covers various categories of expenses, including salary and wages, supply costs, computer rental or lease, and contractor costs.
Salary & Wages
Under the R&D tax credit, eligible salary and wages fall into three main categories:
- Direct Research: This category includes individuals directly involved in performing research activities, such as researchers, engineers, CAD associates, and project managers. These employees are at the core of the credit.
- Direct Supervision: Employees directly supervising those engaged in direct research activities also qualify for the credit.
- Direct Support: Individuals providing direct support to research efforts are considered for the credit. For example, if a researcher has an assistant responsible for note-taking and data accumulation, the assistant's time can be included. Similarly, individuals testing prototypes and first articles can be considered for direct support credits.
Supply Costs
Companies can include the cost of materials used for prototyping and testing when calculating eligible supply costs. For instance, expenses associated with prototype builds and materials utilized in evaluating new formulations, such as beauty products, can be included.
Computer Rental or Lease
With the increasing demand for complex research algorithms and testing techniques in software development, claiming expenditures for computer rentals or lease costs has become more common. This includes costs associated with dedicated cloud storage specifically utilized for research activities.
Contractors
When research activities are performed by non-employees, the expenses incurred can also be eligible for the R&D tax credit. Contractors or outside resources hired for research-related tasks can be included. For instance, if a company needs to hire a specialist with expertise in electrical engineering to aid their research, 65% of the contractor costs can be considered for the credit.
R&D Tax Credit vs. R&D Tax Deduction: What's the Difference?
Businesses that invest in research and development may encounter two tax concepts that sound similar but work very differently: the R&D tax credit and the R&D tax deduction. Both relate to research and development spending, but they are not interchangeable. They operate under different sections of the tax code, affect a business's taxes differently, and have different qualification rules.
R&D Tax Credit for Manufacturing Companies: What CPAs Need to Know
Manufacturing clients are among the strongest candidates for the federal R&D tax credit, yet many never claim it. The work that qualifies often looks like everyday operations: engineers refining a product, a production team automating a line, or a quality group testing new materials to cut scrap. For CPAs, that creates an opportunity to deliver real value by recognizing qualifying activity early. This guide covers which manufacturing activities and expenses may qualify, how the Four-Part Test applies, what documentation matters, and the questions that can help uncover R&D opportunities with your clients.
Does My Business Qualify for the R&D Tax Credit? The 4-Part Test Explained
"Does my business qualify for the R&D tax credit?" — this guide breaks down the IRS 4-part test, what counts as a business component, and which expenses qualify.