When the R&D credit is worth a study, and when it is not

The federal research credit under Section 41 rewards work a company is already doing. A study does not create qualified research. It identifies and documents it. So the first question is not whether a study will produce a credit, but whether the company is doing work that meets the tests.

The four-part test

Activities qualify only if they meet all four requirements:

• Permitted purpose: the work aims to create or improve a product, process, software, formula, or technique in function, performance, reliability, or quality.
• Technological in nature: it relies on engineering, the physical or biological sciences, or computer science.
• Elimination of uncertainty: at the outset, the company did not know how to achieve the result, the right method, or the appropriate design.
• Process of experimentation: substantially all of the activity, generally 80% or more, involves evaluating alternatives through modeling, simulation, testing, or trial and error.

Qualified costs are mainly wages for people performing, supervising, or directly supporting the work, supplies consumed in it, and 65% of amounts paid to U.S. contractors. Research performed outside the United States, research funded by someone else, and work after commercial production begins do not qualify.

When a study is usually worth it

• Engineers, developers, or scientists spend meaningful time solving technical problems, and their wages are a large share of payroll.
• The company pays income tax now, or expects to, since unused credits carry forward 20 years.
• The company is a qualified small business, with gross receipts under $5 million and no gross receipts more than five years back, and can apply up to $500,000 a year against payroll taxes.
• The state where the work happens offers its own credit, as Texas and many other states do.

When it may not be

• Development is done mostly by foreign teams, or by contractors who keep the financial risk or the rights to the results.
• Qualifying wages are small enough that the credit, often roughly 6% to 10% of qualified spending, would not cover the cost of documenting it.
• The company cannot support the work with records showing who did what, on which projects, and why.

Documentation now carries more weight

The IRS requires refund claims to identify each business component, the research performed, and the people and costs involved. The revised Form 6765 asks for similar detail on original returns. Section G, the business component section, is optional for 2025 and required for most taxpayers beginning in 2026. Companies that track projects and time during the year are in a far better position than those reconstructing it later.

Vallou prepares federal and state R&D credit studies with CPA review, starting with a short assessment of whether the work and the numbers justify a full study.