Blog · Tax Credits
What Is the R&D Tax Credit and How Does It Work?
The R&D tax credit, formally the credit for increasing research activities in IRC 41, is a federal income tax credit for qualified research expenses: wages, supplies and 65% of contract research spent on work that passes a four-part test. It equals 20% of those expenses above a base amount, or 14% under the simplified method, and is claimed on Form 6765 with the tax return.
The research and development tax credit was first enacted in 1981, and since a December 2015 law it has had no expiration date. The IRS calls it the credit for increasing research activities; most people call it the R&D tax credit or the research credit. It pays for the process, not the outcome: research that fails can still count, while a best-selling product built without real technical uncertainty may not.
This guide follows the credit from start to finish: what it is worth, who can claim it, which costs count, the two ways to compute it, the form, what happens to credit you cannot use yet, how it works with the new section 174A deduction, and how to recover years you missed. Each part links to a deeper guide.
The R&D tax credit at a glance
| Item | Rule | Source |
|---|---|---|
| Code section | IRC 41, the credit for increasing research activities | 26 U.S.C. 41 |
| Kind of credit | A general business credit against income tax, claimed with the annual return | Section 38(b)(4) |
| What it measures | Qualified research expenses (QREs) above a base amount | Section 41(a)(1) and (b) |
| Work that qualifies | Research that passes the four-part test, checked for each business component | Section 41(d) |
| Regular method | 20% of QREs above the base amount | Section 41(a)(1) |
| Simplified method (ASC) | 14% of QREs above half the prior three-year average; 6% if any of those years had no QREs | Section 41(c)(4) |
| Reduced credit option | 79% of the credit, with the section 174A deduction left whole | Section 280C(c)(2) |
| Form | Form 6765 (Rev. December 2024), attached to the income tax return | IRS |
| Credit you cannot use yet | Carried back 1 year and forward 20 years | Section 39(a)(1) |
| Startup option | Up to $500,000 a year against employer payroll tax | Section 41(h) |
| Expiration date | None since P.L. 114-113 (December 18, 2015) | Section 41 amendment notes |
Where the research credit sits on a tax return
The research credit is one of the general business credits listed in section 38(b), alongside credits such as the work opportunity and FICA tip credits. It is added to those credits on Form 3800, and the total you can use in a year is capped: it cannot exceed your net income tax minus the greater of your tentative minimum tax or 25% of net regular tax liability above $25,000. Credit that does not fit is not lost. Section 39 carries it back one year and forward up to 20 years.
Section 38(c) also treats the research credit of an eligible small business as a specified credit, so it can offset the alternative minimum tax. An eligible small business here is a corporation whose stock is not publicly traded, a partnership or a sole proprietorship with average annual gross receipts of $50 million or less for the prior three years. The R&D tax credit for small businesses guide covers how that and the payroll offset help companies with little income tax.
Who files what depends on the entity. A C corporation claims the credit on its own return. Partnerships and S corporations must file Form 6765 to claim it, then pass it to owners on Schedule K-1 (box 15, code M for partners; box 13, code M for S corporation shareholders), and owners enter it on line 29 of their own Form 6765 or on Form 3800. A sole proprietor attaches Form 6765 to Form 1040. For an individual who owns a business directly or through a pass-through entity, section 41(g) limits the credit to the tax attributable to that business’s share of taxable income; the excess carries to other years under section 39.
Who can claim the R&D tax credit
The income tax credit has no size limit, industry list or revenue test. The tests apply to the work and the costs, and four points decide whether a business can use them:
- A trade or business. QREs must be paid or incurred in carrying on a trade or business. Costs incurred before a new business starts generally do not qualify under Treas. Reg. 1.41-2(a), but section 41(b)(4) carves out in-house research of a start-up whose principal purpose is to use the results in a future active business.
- Related companies count as one. Members of a controlled group of corporations, and trades or businesses under common control, compute a single credit and share it in proportion to each member’s part of the group’s research spending under section 41(f).
- Research for others. If you do research for a customer and keep no substantial rights in the results, it is not your research for this credit, and research paid for by someone else is excluded to the extent it is funded.
- Any entity type. C corporations, S corporations, partnerships and sole proprietors can all claim it, subject to the pass-through limit above.
What counts as qualified research
Only research that passes all four parts of section 41(d) counts, and the test is run separately for each business component, meaning each product, process, computer software, technique, formula or invention:
- Its costs are domestic research or experimental expenditures under section 174A.
- It seeks information that is technological in nature.
- That information is meant to help develop a new or improved business component.
- Substantially all of it, 80% or more under Treas. Reg. 1.41-4, is a process of experimentation aimed at function, performance, reliability or quality.
Section 41(d)(4) then removes eight kinds of work even when they pass, including research after commercial production, adapting a product to one customer’s needs, market research and routine quality control, and research funded by another person. Software built for your own back office must also clear a high threshold of innovation test. Every part, with the regulations’ definitions and labeled examples, is in R&D tax credit requirements: the four-part test.
Which costs count: the three QRE categories
Section 41(b) builds QREs from three kinds of spending, all tied to qualified research:
- Wages for qualified services. Pay for employees who do the research, supervise it at the first line, or directly support it, using the income tax withholding definition of wages in section 3401(a). Wages used for the work opportunity credit are left out.
- Supplies. Tangible property used in the research. Land, land improvements and anything you depreciate are not supplies.
- Contract research. 65% of what you pay a non-employee to do qualified research on your behalf, 75% for a qualified research consortium, and 100% for energy research paid to an eligible small business, a university or a federal laboratory.
A narrow fourth item, amounts paid to use someone else’s computers in the research, also counts when the computers sit off your premises and you are neither the operator nor the primary user. Building rent, general utilities, depreciation and overhead count under none of these headings. How to allocate a person’s time, and what to do with contractor invoices that mix research and other work, is step one of how to calculate the R&D tax credit.
Two ways to compute the credit
| Regular credit | Alternative Simplified Credit (ASC) | |
|---|---|---|
| Rate | 20% (15.8% with the reduced credit) | 14%, or 6% when one of the 3 prior years had no QREs (79% of either with the reduced credit) |
| What the base is | Fixed-base percentage times average gross receipts for the 4 prior years, never less than 50% of this year’s QREs | Half of the average QREs for the 3 prior years |
| History you need | QREs and gross receipts for 1984 through 1988, or the start-up schedule built from your own early years | QREs for the 3 prior years, figured on the same basis as this year |
| How long the choice lasts | Used every year until you elect the ASC | Applies to later years until revoked; you revoke it by completing Section A on a timely original return |
| On an amended return | Allowed while the refund period is open, unless an earlier ASC election still covers that year | Allowed only if no research credit was claimed for that year on any earlier return |
| Form 6765 lines | Section A, lines 1 to 13 | Section B, lines 14 to 26 |
The regular credit is larger when this year’s QREs are high compared with gross receipts, measured against the company’s own fixed-base percentage. Because its base can never drop below half of the year’s QREs, it can never exceed 10% of them. The ASC compares this year only with the last three, which needs far less history, and Treas. Reg. 1.41-9 sets the election rules above. The calculation guide works one example of each, and the R&D tax credit calculator runs the ASC on your own numbers.
How the credit is claimed: Form 6765
The current Form 6765 is the December 2024 revision, used with instructions revised in December 2025. It is attached to the income tax return and is organized this way:
| Part | What it holds |
|---|---|
| Items A and B | The section 280C reduced credit choice, and whether you belong to a controlled group or business under common control |
| Section A or B | The credit under the regular method or the ASC |
| Section C | This year’s credit, plus research credit passed through from partnerships, S corporations, estates and trusts |
| Section D | The startup payroll election (skip it unless you are electing) |
| Section E | Required whenever you report QREs: the number of business components, officers’ wages inside the research wages, acquisitions or dispositions, new expense categories, and ASC 730 Directive amounts |
| Section F | QREs by category, totaled on line 48 |
| Section G | QREs by business component (see the rules below) |
Section G by tax year. It is optional for every filer for tax years beginning before 2026, so a calendar-year 2025 return can leave it blank. For tax years beginning after 2025 it is required, with two exceptions: a qualified small business that checks the payroll election box, or a filer whose QREs at the controlled-group level are $1.5 million or less, whose average annual gross receipts for the prior three years are $50 million or less, and who claims the credit on an original return. That is the rule in the December 2025 instructions and IR-2025-99; the IRS About Form 6765 page listed no later change when we checked it on September 25, 2026. The Form 6765 and Form 8974 guide goes line by line.
Full credit or reduced credit: the section 280C(c) choice
For tax years beginning after December 31, 2024, section 280C(c) makes you pick between two treatments. Take the full credit, and your section 174A deduction for domestic research costs (or the amount you capitalize) is reduced by the credit. Or elect the reduced credit: the credit minus the product of the credit and the top corporate rate in section 11(b), 21%, which leaves the deduction whole. On Form 6765 that is 79% of the ASC, or 15.8% instead of 20% under the regular method.
The choice is Item A at the top of the form. It must be made on the original return filed on time, including extensions; it is irrevocable for that year; and it cannot be made or changed on an amended return. The instructions allow a Yes on Item A even on a return that claims no credit, which keeps the option open if a credit is added later. Any amount a startup elects to use against payroll tax is still treated as research credit for this rule.
How section 174A changes the picture
For tax years beginning in 2022 through 2024, section 174 required businesses to capitalize research costs and deduct domestic costs over five years. P.L. 119-21, signed July 4, 2025, added section 174A, which allows a current deduction for domestic research or experimental expenditures paid or incurred in tax years beginning after December 31, 2024. The same law rewrote the first part of the four-part test, which now points to section 174A, and changed section 280C as described above. Foreign research stays on 15-year amortization and never counts for the credit. The section 174 and 174A guide explains the transition choices for costs capitalized in 2022 through 2024.
Startups: the payroll election in one paragraph
A qualified small business, meaning gross receipts under $5 million for the year and none in any year before the five-year period ending with that year, can elect to apply up to $500,000 a year of its research credit against the employer share of Social Security tax, and then Medicare tax, instead of income tax. The election goes in Section D of Form 6765 on an original return filed on time, and the IRS says it cannot be made on an amended return. The small business guide covers the election in depth, and Payroll Credits is how BEG handles it.
Missed the credit in earlier years?
An open year can usually be amended to add the credit: on an amended return, or on an administrative adjustment request for a partnership under the centralized audit rules. The general deadline in section 6511 is 3 years from the date the return was filed or 2 years from the date the tax was paid, whichever is later. For claims postmarked after June 18, 2024, the IRS requires each research credit refund claim to identify every business component involved, the research activities for each, and total qualified wages, supplies and contract research for the year.
Three elections limit what an amendment can do. The ASC can be elected on an amended return only for a year in which no research credit was claimed before. The reduced credit cannot be elected on an amended return at all, so for tax years beginning after 2024 a credit added later reduces the section 174A deduction, unless the original return already answered Yes on Item A. And the payroll election is never available on an amended return. The guide to claiming a missed R&D credit on an amended return walks through the claim, and recovering open years is the Credit Recovery work on the Tax Planning page.
Records that support the credit
Treas. Reg. 1.41-4(d) requires records in sufficiently usable form and detail to show that the expenses claimed are eligible. Because the four-part test and the IRS refund-claim rules both run business component by business component, organize the file the same way: what each project set out to resolve, the alternatives tried, who did the work and how their time was measured, and the invoices and contracts behind supplies and contract research. The R&D tax credit documentation checklist lists each record with its source.
Six common misconceptions
- Only labs qualify. A business component can be a product, process, computer software, technique, formula or invention. What matters is the method: a process of experimentation that relies on engineering, the physical or biological sciences, or computer science.
- The work has to succeed. It does not. The regulations say the search for technological information does not require success in developing the new or improved component.
- You need a patent. No. A patent other than a design patent is conclusive evidence that you discovered technological information, but it is not a precondition for the credit.
- It is a deduction. It is a credit, subtracted from income tax dollar for dollar within the general business credit limit. A deduction is involved only through section 280C, which may reduce your 174A deduction by the credit.
- It pays out cash. It reduces tax. An amended return can produce a refund only of tax you actually paid, and the payroll election for startups offsets payroll tax already owed.
- Losses mean no benefit. Credit you cannot use carries forward 20 years, and a qualified small business can apply up to $500,000 a year against payroll tax instead.
Anthony leads sales at Business Executive Group, a national HR services firm. BEG coordinates R&D credit work for its clients; the tax work itself is done by licensed tax professionals at BEG's tax partner.
Sources: 26 U.S.C. 41; 26 U.S.C. 38; 26 U.S.C. 39; 26 U.S.C. 174A; 26 U.S.C. 280C; 26 U.S.C. 11; 26 U.S.C. 6511; Public Law 119-21, section 70302 (July 4, 2025); IRS, Form 6765 (Rev. December 2024); IRS, Instructions for Form 6765 (Rev. December 2025); IRS, About Form 6765; IRS, IR-2025-99 (October 1, 2025); IRS, Research credit claims (Section 41) on amended returns FAQs; IRS, Qualified small business payroll tax credit for increasing research activities; IRS, Instructions for Form 8974 (Rev. December 2024); Treas. Reg. 1.41-2 (eCFR); Treas. Reg. 1.41-4 (eCFR); Treas. Reg. 1.41-9 (eCFR). Rules and figures checked against these sources on September 25, 2026. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.
R&D tax credit questions
What is the R&D tax credit?
It is the federal credit for increasing research activities under IRC 41. A business earns it on qualified research expenses (wages, supplies, computer rental and 65% of contract research) for work that passes the four-part test in section 41(d). It is a general business credit that reduces income tax and is claimed on Form 6765.
Is the federal R&D tax credit permanent?
Yes. The credit was first enacted in 1981, and P.L. 114-113, enacted December 18, 2015, struck the termination date that earlier versions of section 41 carried. The same law added the payroll election for small businesses.
How much is the R&D tax credit worth?
Under the regular method, 20% of QREs above a base amount, which works out to no more than 10% of the year’s QREs because the base is never below half of them. Under the ASC, 14% of QREs above half the prior three-year average, or 6% if one of those years had none. The reduced credit keeps 79% of either. The dollar result depends entirely on your costs and history.
Is the R&D tax credit refundable?
No. It reduces income tax, and any amount you cannot use carries back 1 year and forward 20 years. A qualified small business can instead apply up to $500,000 a year against employer payroll tax, but that offsets tax owed; it is not a cash payment.
Can an S corporation or partnership claim the R&D tax credit?
Yes. The entity computes the credit on Form 6765, which partnerships and S corporations must file to claim it, and passes it to owners on Schedule K-1 (box 15, code M for partners; box 13, code M for shareholders). Section 41(g) limits each owner to the tax on their share of the business’s taxable income and carries the rest to other years.
Can a sole proprietor claim the R&D tax credit?
Yes. The IRS lists Form 1040 among the returns Form 6765 can be attached to. The section 41(g) limit applies here too: the credit cannot exceed the tax attributable to the business’s taxable income, with any excess carried to other years.
Which IRS form is used to claim the R&D tax credit?
Form 6765, Credit for Increasing Research Activities (Rev. December 2024), with the December 2025 instructions. The credit then flows to Form 3800 with your other general business credits, or to Schedule K for a partnership or S corporation.
Is Section G of Form 6765 required for 2026?
For tax years beginning after 2025, yes, unless an exception applies: you are a qualified small business electing the payroll credit, or your QREs are $1.5 million or less, your average gross receipts for the prior three years are $50 million or less, and you are claiming on an original return. For 2025 and earlier years it is optional.
What happens if my R&D credit is more than my tax?
Section 38(c) caps the general business credits you can use in a year, and section 39 carries the excess back 1 year and forward 20 years. A qualified small business can also move up to $500,000 a year onto payroll tax with the section 41(h) election.
Can I claim the R&D credit for prior years?
Usually for open years, on an amended return filed within 3 years of the original filing or 2 years of paying the tax, whichever is later. The claim must identify each business component, the research activities for each, and total QREs. The ASC can be elected on an amended return only for a year with no earlier credit claim, and the reduced credit and the payroll election cannot be made on one.
Does research done outside the United States count?
No. Section 41(d)(4)(F) excludes research conducted outside the United States, Puerto Rico and U.S. possessions. Those costs are also foreign research expenditures under section 174, which are amortized over 15 years instead of deducted.
R&D Payroll Tax Credit
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Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.
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