R&D Tax Credit Misconceptions and Guidelines

March 23, 2023 - 7 minutes read

As a business owner, you understand how important it is to stay informed and up-to-date on all the applicable tax credits available. One credit in particular that may offer beneficial savings for your organization, is the Federal Research and Development Tax Credit (R&D Credit). While this credit offers numerous advantages, there are still certain misconceptions and guidelines around its use. This blog will introduce some of these common myths regarding the R&D Credit as well as provide an overview of what eligible expenses look like so you can make sure your company is taking full advantage and maximizing potential savings!

Overview of the federal R&D Tax Credit

The federal research and development (R&D) Tax Credit is designed to help businesses of all sizes offset costs associated with their innovative endeavors. The credit can lower the overall tax burden of organizations by providing a dollar-for-dollar reduction in taxes owed. The credit applies directly to out-of-pocket expenses such as wages, materials and supplies utilized for R&D activities. The credit is not exclusive to any business size or industry and can be applied for a variety of undertakings, including developing new products or services, improving existing ones, and introducing processes that are either more cost effective or efficient. The federal R&D Tax Credit enables organizations to use the savings in taxes to further invest in innovation projects that foster growth.

Common misconceptions surrounding the credit

Many business owners are unaware of the details surrounding the federal Research and Development Tax Credit, leading to common misconceptions. It is important to understand that only qualified research and development activities – as defined by the Internal Revenue Service – are eligible for this credit. These activities include basic research; applied research; or experimental development related to new or improved software, products, processes and techniques that are intended for commercialization. Businesses need to be mindful of what activities qualify when leveraging the R&D tax credit in order to maximize their benefit.

How to determine eligibility for the credit

Determining eligibility for the federal research and development (R&D) Tax Credit is an important element of business management. The criteria are based on qualifying R&D expenses and business size does not matter. Companies should review their business practices to determine if activities such as developing new products, refining existing products, or adapting products in response to customer requirements meet the criteria. Further, businesses can consider taking advantage of the specialized help that a CPA might provide to identify qualified R&D activities and maximize their credit benefits.

What activities qualify for the credit

The Federal Research and Development Tax Credit provides businesses of all sizes with a tremendous opportunity. Qualifying activities include hard science, developing, or improving products, processes and/or software; resolving technological uncertainties; testing multiple design alternatives; and/or establishing new or improved manufacturing methods. In other words, any type of creative problem solving, technological development, and/or research projects can qualify for this credit. Having this knowledge allows business owners to access the resources needed to develop innovative products, gain a competitive edge in their markets, and ultimately increase their bottom line.

The benefits of utilizing the credit

Taking advantage of the federal R&D Tax Credit can bring myriad benefits to businesses. Even even if unsuccessful in their pursuit of a claim, firms can experience cost savings by analyzing the expenditure associated with their projects and applying those costs towards the credit. Moreover, even businesses without traditional scientific or engineering activities can still qualify for substantial credits – even seemingly mundane activities such as updating an existing software or even bringing a product back from overseas production could be eligible for the credit. In addition, unlike other credits, money generated through this credit is flexible and it can even reduce payroll tax liabilities and create further savings. All in all, utilizing the federal R&D Tax Credit is a wise choice for financial success in business.


The federal R&D Tax Credit has many advantages for businesses of all sizes. Although there may be some misconceptions surrounding the credit, it can serve as a great asset to organizations engaging in eligible activities. To effectively take advantage of the credit, businesses should first determine their eligibility, and then research which activities are covered by the credit. Not only can this benefit smaller businesses in reducing their tax liability, but also larger companies with more complex needs since these companies have numerous operating divisions that can potentially perform research and development activities. All in all, there are plenty of benefits to utilizing the R&D Tax Credit. If you believe your company may be eligible for this important credit, our office would be happy to help you thoroughly understand your qualifications and create an effective plan. Give us a call today to get started.

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