Research (R&D) Tax Credit

What Is the Research (R&D) Tax Credit?

What if you could capture tax savings for the research expenses your business undertakes? The federal research tax credit (also commonly called the Research & Development, or R&D tax credit) allows businesses to claim tax credits for qualifying research expenses. Designed to incentivize investment in new products, processes, and software, this valuable and often overlooked credit can generate significant savings that companies can reinvest in ongoing innovation.

What Activities and Expenses Qualify for the R&D Tax Credit?

Research activities such as new product development, process improvements, and technical problem solving can qualify for the R&D tax credit. The qualifying research expenses used to calculate the credit are primarily either:

Labor costs of employees or contractors involved in R&D activity
The cost of supplies consumed in the R&D process and/or the development of prototypes

Our Dedicated Focus and Proven Methodology for the R&D Tax Credit

There are no guarantees when it comes to research. However, when you partner with KSM, you will benefit from our team’s dedicated focus and proven methodology. We do more than help capture the R&D tax credit – we guide you through the complexities of eligibility and compliance.

We serve our clients by:

Educating key stakeholders on qualifying activities and coaching them to identify opportunities in real time
Identifying and calculating eligible expenses and related federal and state tax credits
Preparing documentation to support compliance with eligibility requirements

We enhance this process with purpose-built tools like Kipsi, a secure platform designed specifically for R&D tax credit studies. By centralizing documentation and streamlining data collection, our technology, combined with our experienced professionals, helps ensure accurate, well-supported, and defensible claims.

How the R&D Tax Credit Works and Is Applied

The R&D tax credit is designed to incentivize businesses that increase their investment in research activity and expenses. Therefore, the amount can vary based on several factors, including a company’s history of R&D activity. Startup companies may be eligible for additional considerations. The credit provides a dollar-for-dollar offset against tax liability.

The R&D tax credit is classified as a general business credit and is applied differently depending on the entity structure. For corporations, the credit is used to offset current liability of the corporation. For pass-through entities, the credit flows through to the partners or shareholders and may only be used to offset the tax liability associated with that trade or business/entity. Eligible startup companies may also elect to have the credit used toward payroll taxes rather than income tax.

In addition to the federal R&D tax credit, many states offer their own R&D tax credits, which may provide additional tax savings depending on where qualifying activities occur.

Federal R&D tax credits that are limited are carried back one year and forward 20 years. State R&D tax credits vary by jurisdiction.

Industries That Commonly Qualify for the R&D Tax Credit

R&D tax credits have traditionally been associated with industries like manufacturing, engineering, and life sciences. However, eligibility has expanded as more businesses invest in process improvements and technology. While the industries below commonly benefit from the credit, organizations across nearly any sector may have qualifying R&D activities.

Manufacturing
Machine Shops
Chemical

Construction
Architecture
Engineering
Electrical/Mechanical Contracting

Software

Life Sciences
Medical Device & Equipment

Agriculture
Brewing

Apparel/Textiles

Added Value Beyond R&D Tax Credit

Helping companies identify and capitalize on R&D tax credits represents just one part of an overall business plan. There are many ways our team can help your business maximize cash flow, improve efficiency, and realize its potential.

KSM’s Tax Services Group has a well-earned reputation for providing strong and successful advocacy in federal and state tax matters. Additionally, our professionals offer consulting expertise across a wide range of industries and possess the technical expertise and institutional knowledge that is so important to succeeding in today’s business environment.

Contact a R&D Tax Credit Advisor