TL;DR

Many businesses perform research and development (R&D) every day without realizing it qualifies for one of the most valuable tax credits available. The R&D tax credit rewards companies that solve problems, test new ideas, or improve processes. From engineering to software development to manufacturing, activities that involve experimentation and technical uncertainty often qualify.

This guide breaks down what counts as R&D for tax purposes, how the IRS defines “qualified research,” and what expenses can be included.

The Purpose Behind the R&D Tax Credit

The federal Research and Development Tax Credit (IRC Section 41) was created to encourage innovation in the United States. It rewards companies that invest time, talent, and resources into improving products, processes, or technologies, whether or not the outcome is successful.

In practice, that means many everyday business activities count as R&D, even when companies don’t call them that.

The IRS Definition of “Qualified Research”

To qualify for the R&D tax credit, an activity must meet all four parts of the IRS’s Four-Part Test:

1. Permitted Purpose – The work aims to improve a product, process, software, formula, or technique for function, performance, reliability, or quality.
2. Elimination of Uncertainty – The outcome isn’t known in advance; there’s uncertainty about capability, method, or design.
3. Process of Experimentation – The work involves testing, modeling, prototyping, simulation, or trial and error to resolve uncertainty.
4. Technological in Nature – The process relies on the principles of engineering, physical sciences, computer science, or biological sciences.

If your project or process checks these four boxes, it likely qualifies.

Common Qualifying Activities

Many companies assume they need laboratories or scientists to qualify for R&D credits, but the IRS’s definition is much broader.
Here are examples by industry:

Manufacturing and Product Design

• Developing prototypes or pilot models.
• Improving manufacturing processes or tooling.
• Testing new materials for strength, weight, or durability.
• Designing custom equipment or components.

Software and Technology

• Developing new applications or integrations.
• Improving system performance, scalability, or security.
• Testing and debugging new code or environments.
• Building algorithms or automating business processes.

Construction and Engineering

• Testing new construction materials or methods.
• Designing systems for unique site or environmental conditions.
• Using BIM or modeling to test alternatives.
• Experimenting with structural, HVAC, or electrical layouts.

A/V and Entertainment Technology

• Developing prototypes for custom installations.
• Experimenting with new sound, lighting, or automation systems.
• Integrating software or hardware to achieve performance goals.

Boating and Marine Manufacturing

• Testing hull shapes, materials, or propulsion systems.
• Engineering for fuel efficiency or durability.
• Conducting sea trials and analyzing test results.

Food, Beverage, and Agriculture

• Reformulating recipes or ingredients for shelf life or flavor.
• Testing new processing or packaging methods.
• Designing equipment for higher efficiency or safety.

If your team experiments to improve how something works, it’s worth evaluating under the R&D credit.

What Expenses Qualify

Once qualifying activities are identified, eligible expenses are grouped as Qualified Research Expenses (QREs):

• Wages for employees directly engaged in, supervising, or supporting qualified research.
• Supplies used during research or prototype development.
• Contract research costs paid to third parties for qualifying work.
• Cloud computing and software expenses used for testing or development environments.

These expenses form the basis for the credit calculation and, when properly documented, can result in substantial savings.

What Doesn’t Qualify

Certain activities fall outside the IRS’s definition of qualified research, such as:

• Routine data collection or market research.
• Quality control testing after commercial production.
• Research conducted outside the U.S.
• Work funded by another entity (e.g., through a government grant).
• Reverse engineering or adapting existing products without experimentation.

While these exclusions exist, they’re often narrower than many businesses think; meaning more work usually qualifies than expected.

Why Many Companies Miss Out

Even companies that are highly innovative often fail to claim the R&D credit for one of three reasons:

1. They don’t realize their activities qualify.
   → Many see innovation as “just part of the job.”
2. They don’t track or document projects correctly.
   → Without identifying costs or time spent, they can’t claim the credit confidently.
3. Their CPA lacks industry-specific expertise.
   → R&D claims require both technical and tax knowledge.

The result: millions in missed credits every year across industries.

The Value of an Expert Review

A proper R&D credit study identifies:

• Every qualifying project (not just “obvious” ones).
• Related employee wages and contractor costs.
• Supporting documentation that meets IRS standards.

Specialists bridge the gap between the technical and the financial, ensuring that the credit is both maximized and defensible.

Documentation: The Key to Compliance

While perfect records aren’t required, reasonable evidence is. Strong documentation might include:

• Project notes, test logs, or meeting summaries.
• Time-tracking or job-costing reports.
• CAD drawings, models, or test data.
• Invoices for supplies or contractor costs.

Good documentation builds a defensible claim.

Why It Matters for 2025

With Section 174 capitalization rules still evolving and innovation driving competitiveness across industries, 2025 is shaping up to be a critical year for proactive R&D planning.

Businesses that:

• Identify qualifying activities early,
• Track costs in real time, and
• Partner with specialists for accurate filings

will see significantly higher returns than those who wait until tax season.

The B10 Capital Difference

At B10 Capital, we combine deep tax experience with technical understanding across multiple industries. Our team:

• Conducts industry-specific eligibility studies to capture every qualifying activity.
• Provides Big Four–level compliance with boutique-level service.
• Collaborates directly with your CPA to ensure seamless filing and documentation.

The result: maximum credits, minimal risk, and full confidence in your claim.

Final Thoughts

If your business designs, tests, or improves products or processes, chances are you’re performing qualified R&D. Whether you’re in construction, software, manufacturing, or entertainment, the key is recognizing (and documenting) the innovation already happening in your company.

The R&D tax credit exists to reward exactly that.

Curious whether your business activities qualify?
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‍Contact B10 Capital today for an eligibility review. We’ll help you identify qualifying work, calculate your potential benefit, and ensure your claim is 100% compliant and defensible.

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