The R&D tax credit, in plain English.
A practical guide to how the federal research credit under IRC Section 41 works, what counts, and what’s changing.
What counts as qualified research?
Under Section 41, research activities generally must meet all four of these tests, applied to each business component.
Permitted purpose
The work aims to create a new or improved business component, such as a product, process, software, technique, formula or invention, relating to function, performance, reliability or quality.
Technological in nature
The work fundamentally relies on principles of the physical or biological sciences, engineering or computer science.
Elimination of uncertainty
At the outset, there was uncertainty about the capability, method or appropriate design of the business component.
Process of experimentation
Substantially all of the activities involve evaluating alternatives through modeling, simulation, prototyping or systematic trial and error.
Which costs can be included?
Wages
Taxable wages for employees performing, directly supervising or directly supporting qualified research.
Supplies
Non-capital supplies used and consumed in the research, such as prototype materials. Generally excludes land, depreciable property and general overhead.
Contract research
Generally 65% of amounts paid to third parties performing qualified research on your behalf, subject to specific rules on rights and risk.
Cloud computing
Amounts paid for the right to use computers, which can include certain cloud hosting used for development and testing, where it meets the rules.
Form 6765 and Section G
Form 6765 is the form used to claim the credit for increasing research activities. The IRS revised it to add Section G, Business Component Information, which asks for detail about each business component, such as what it is and the information you were seeking to discover.
Section G was optional during a transition period. It is required for most filers for tax years beginning after 2025, with certain exceptions, including for some smaller claims. Project-level documentation is now central to the claim.
A note on Section 174
Section 174 governs how research and experimental expenditures are treated for tax purposes, which is separate from the Section 41 credit but closely related. These rules have changed several times in recent years, including through 2025 legislation affecting how domestic research costs may be deducted.
Because the interaction between Section 174 and the credit depends on your situation, we coordinate with your CPA on how they apply to you.
The payroll tax offset
A qualified small business, generally one with gross receipts under $5 million and no gross receipts more than five years back, can elect to apply part of its research credit against payroll taxes. This can help early-stage companies benefit even before they owe income tax.
State R&D credits
Many states offer their own research credits, each with its own definitions, rates, caps and filing rules. A good federal study is often the foundation for state claims too.
Not tax advice. The R&D Credit Center provides general information that is accurate to our understanding at the time of writing and may not reflect later changes in law or guidance. It is not tax, legal or accounting advice. Talk with a qualified professional about your specific situation.
Questions about your situation? Ask a specialist.
Start with a free eligibility review. We’ll look at your projects and tell you plainly what may qualify.