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The R&D Credit is a permanent part of the tax code.
Yes. U.S. law provides three key incentives:
Immediate deduction of domestic R&E expenses under Section 174A
Capitalization and 15-year amortization of foreign R&E expenses under 174
Immediate R&D tax credit for qualified research expenses under Section 41
Eligible costs include research performed by your business and research done on your behalf.
The current tax year and up to three previous years.
Domestic R&E (after OBBBA, from 2025 onward):
Can be immediately deducted under Section 174A.
2022–2024 domestic costs still follow old capitalization rules, but transition options let you deduct remaining amounts in 2025–2026 or retroactively if you qualify.
Foreign R&E (from 2022 onward):
Must be capitalized and amortized over 15 years under Section 174.
Examples of non-qualifying activities for the Section 41 credit:
Work after commercial production begins
Adapting or copying existing products or components
Routine quality control, data collection, or efficiency surveys
Research performed outside the U.S.
Research funded by grants, contracts, or other parties
Market research, surveys, and customer preference studies
Work in arts, humanities, or social sciences
The IRS defines QREs as in-house and contract research expenses:
In-house QREs:
Employee wages for qualified services
Supplies used in qualified research
Computers and cloud environments used directly in research
Contract research:
A percentage (commonly 65%) of payments to third parties performing qualified research on your behalf
If “substantially all” (at least 80%) of an employee’s services are for qualified research:
100% of that employee’s wages can be treated as QREs.
The IRS emphasizes that eligibility should be based on what the employee actually does (using time records, project logs, etc.), not just their title.
You can generally:
Deduct domestic R&E costs under Section 174A
Amortize foreign costs under Section 174
Claim the Section 41 R&D credit
However, Section 280C(c) requires you either to:
Reduce your Section 174A deduction by the credit you take, or
Elect to reduce the credit instead
This prevents double-counting the same costs for both a full deduction and a full credit.
Typical documentation includes:
Payroll records and time tracking
Profit and loss statements and trial balances
Invoices and expense receipts
Prototypes, blueprints, drawings, and models
Engineering notes, lab reports, test data
Project plans, tickets, and meeting notes
This support is also crucial if the IRS reviews your claim.
If you can’t use the full credit in the current year:
First, you may carry it back one year (if that year had tax liability).
Any remaining credit can be carried forward for up to 20 years.
You can usually claim the R&D credit for open tax years by filing amended returns.
This is typically about three years, sometimes longer if you have losses or special circumstances.
Yes. Profitability is not required:
You can carry credits forward to future profitable years.
If you qualify as a “Qualified Small Business,” you may also use part of the credit to offset payroll taxes.
You can claim costs for phases with technological uncertainty (research, development, prototyping, testing) within each tax year.
Detailed records help you assign costs to the correct year.
If you missed prior years, you may still amend returns (often up to two–three years back, depending on your situation).
Filing for the R&D credit does not automatically trigger an audit, and claims filed on timely original returns are not audited at a higher rate than other returns.
That said, the IRS may review your claim, so it’s important to:
Maintain strong documentation
Ensure your projects truly meet the R&D criteria
Be prepared to explain your methodology and calculations
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