R&D tax credit
Explore with diligence: legitimate, needs careful checks.
The research and development credit isn't only for labs and tech companies. Businesses that develop or improve products, processes, software or techniques, and work through technical uncertainty to do it, can often qualify.
It's a credit, which reduces tax dollar for dollar rather than just lowering taxable income, and some young companies can apply it against payroll tax even before they owe income tax.
How it works
Money spent developing or improving products or processes can earn a tax credit, not just a deduction. Small companies can sometimes apply it against payroll tax.
What makes it hold up
- A description of each project and the problem it solved
- Time spent by each person on qualified work
- Supplies and contractor costs tied to each project
Risks
Moderate. Credit claims get IRS attention, and new forms ask for project-by-project detail. Weak records are the usual reason claims fail.
Questions to ask your CPA
- Do our projects qualify?
- Is a study worth its cost at our size?
- Can we amend earlier years?
Common questions
What kind of work qualifies?
Work that aims to create or improve a product or process, relies on engineering, science or computer science, involves real uncertainty about how to do it, and tests alternatives to resolve it. Routine work and cosmetic changes don't count.
Can a small company use it against payroll tax?
Yes, if it's a qualified small business: generally under $5 million in gross receipts and no more than five years of receipts. That lets startups benefit before they're profitable.
What records do I need?
A description of each project and the technical problem it solved, the time each person spent on it, and the supplies and contractor costs tied to it. Weak records are the usual reason claims fail.
Is a study worth paying for?
It depends on how much qualifying work you do. Ask for an estimate of the credit before committing, and be wary of firms whose fee is a large share of what they find.
Cratchit runs every strategy in this library against your real numbers, rates it, and keeps the records that make it hold up. Take a guided tour with the Harpers, a sample family.
Try the demoEducation, not advice. Tax law changes and every situation is different, so confirm the details with your CPA or tax advisor before acting. This page was last checked against tax law as of October 2026, including the 2025 tax law, in October 2026.