INSIGHT

Unlocking value through R&D tax credits in tech 

David Aiello • April 2, 2025

Services: R&D Tax Credit Industries: Technology

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Technology companies are driving innovation across every sector of the modern economy, making substantial investments in research and development along the way. Many of these companies don’t realize they could recoup significant portions of their R&D spending through available tax credits.  

This article will explore how tech companies can leverage R&D tax credits, qualification criteria and the types of activities and expenses that qualify for these valuable incentives. 

Understanding R&D tax credits 

R&D tax credits provide dollar-for-dollar tax savings that directly reduce a company’s income tax liability. These credits hold particular value for startup tech companies because under certain circumstances they can offset payroll taxes.  

The qualification process follows a four-part test that evaluates: 

• The technical nature of the work performed 
• The permitted purpose of the research activities 
• The presence of technological uncertainty 
• A documented process of experimentation 

Qualifying activities in the tech sector 

Tech companies regularly engage in activities that qualify for R&D credits. Software development, artificial intelligence programming and platform engineering projects often meet the criteria. Companies can claim credits for: 

• Designing and testing new prototypes 
• Developing new software applications 
• Creating specialized technologies 
• Improving existing components 
• Engineering new manufacturing processes 

Hardware development and integration projects also frequently qualify, including: 

• Testing alternative materials for product enhancement 
• Improving manufacturing efficiency through automation
• Developing new hardware configurations 
• Creating innovative IoT solutions 
• Integrating emerging technologies with existing systems 

Calculating qualified expenses 

The amount companies can save through R&D credits typically ranges from 5 percent to 15 percent of qualifying expenses. These expenses include: 

• Employee wages: Compensation for staff directly conducting research, supervising research activities or providing direct support 
• Supply costs: Materials used in R&D processes 
• Contract research: Payments to third-party companies performing specialized development work 
• Computer rental: Payments made to cloud computing vendors for research activities.  

While calculating these expenses requires careful documentation, companies may include expenses related to failed projects or abandoned research paths. The IRS does not automatically recognize that uncertainty and experimentation are inherent parts of the R&D process.  

Special considerations for startups 

Pre-revenue tech companies can benefit significantly from R&D credits through the payroll tax election. Companies with less than $5 million in gross receipts can apply up to $500,000 of their R&D credit against payroll taxes, providing valuable cash flow during crucial growth phases. 

Documentation requirements for claiming R&D tax credits 
Starting in 2024, companies must provide more detailed information on Form 6765. This includes: 

• Disclosing the total number of business components (projects) 
• Separately listing the amount of officers’ wages  
• Business acquisitions/dispositions 
• Identifying new cost categories that were not previously claimed 

Changes on the horizon 

The R&D credit landscape continues to evolve, with new legislation under consideration at both federal and state levels. Companies must stay informed about these changes to maximize their benefits. 

Working with BPM  

Navigating R&D tax credits requires careful planning and thorough documentation. BPM combines deep technology sector knowledge with tax credit optimization experience to help companies identify qualifying activities, document expenses properly and maximize their R&D credit benefits. Our team works closely with tech companies of all sizes to develop comprehensive R&D credit strategies that align with their growth objectives while ensuring compliance with current regulations. 

To learn how we can help your technology company leverage R&D tax credits effectively while maintaining compliance with evolving requirements, contact us.