R&D tax credits are dollar-for-dollar reductions in tax liability for companies that conduct qualifying research activities. They’re designed to incentivize innovation and technological advancement.

While many industries can qualify, common ones include manufacturing, software development, engineering, aerospace, pharmaceuticals, food science, and agriculture.

Qualifying activities must meet a four-part test:

• Be technological in nature

• Involve the elimination of uncertainty

• Involve a process of experimentation

• Have a qualified purpose (to create new or improved business components)

Qualified research expenses typically include:

• Wages for employees conducting research

• Supplies used in the research process

• Contract research expenses (65% of payments to contractors)

• Rental or lease costs of computers used in research activities

You can typically claim R&D tax credits for the current tax year plus the previous three tax years.

Yes, qualifying startups can use the credit to offset up to $250,000 in payroll taxes annually for up to five years.

The credit is generally calculated as a percentage of qualified research expenses over a base amount, which is determined by your company’s historical research activities.

You should maintain contemporaneous documentation of your research activities, including project records, payroll records, general ledgers, and any other documents that support your qualified research expenses.