Most tech startups qualify for significant R&D tax credits but don't know how to claim them. This comprehensive guide shows you how to identify, calculate, and claim these valuable credits.
15 minute read • Updated January 2024
Federal credit rate on qualified expenses
Average credit for tech startups
Of software companies qualify
The Research and Development (R&D) tax credit is a dollar-for-dollar reduction in your tax liability for qualified research expenses. Originally designed for traditional R&D labs, the credit now covers most software development activities that involve technical uncertainty and innovation.
To qualify for R&D credits, activities must meet ALL four criteria:
Relies on engineering, computer science, or physical/biological sciences
Uncertain how to achieve desired result or best method
Evaluating alternatives through trial and error
Intended to improve functionality, performance, or reliability
Total Annual Benefit: $45K-$55K
Total Annual Benefit: $195K-$220K
R&D credits have higher audit rates. Proper documentation is essential to defend your claims. The IRS expects contemporary records that clearly demonstrate qualifying activities.
Many states offer additional R&D credits that can significantly increase your total benefit. Some states even allow credits for activities that don't qualify federally.
| State | Credit Rate | Refundable? | Notes |
|---|---|---|---|
| California | 15% | No | Plus additional credits for certain activities |
| New York | 9% | Yes | Fully refundable for qualified companies |
| Texas | 5% | No | Against franchise tax |
| Illinois | 6.5% | Yes | Refundable with limitations |
| North Carolina | 3% | Yes | Refundable for qualified companies |
Many startups fail to document how much time developers spend on qualifying vs. non-qualifying activities.
Solution: Implement project tracking that separates R&D work from routine maintenance and feature implementation.
Being too aggressive and claiming routine development work that doesn't meet the four-part test.
Solution: Be conservative and only claim activities with clear technical uncertainty and experimentation.
Starting to track R&D activities only when preparing taxes, missing valuable credits from earlier years.
Solution: Set up R&D tracking systems from day one, even if you don't claim credits immediately.
Review your development activities against the four-part test. Most software companies qualify.
Implement time tracking, project coding, and documentation processes for ongoing compliance.
Estimate your qualified research expenses and potential federal and state credits.
R&D credit studies typically pay for themselves 3-5x over. Consider specialist firms for complex situations.
Our R&D credit specialists can help identify qualifying activities and maximize your credits. Most studies pay for themselves 3-5x over in the first year alone.