The Research and Development (R&D) Tax Credit remains one of the most valuable opportunities available to U.S. businesses. It’s designed to reward companies that innovate, improve processes, or develop new products — and it can significantly reduce your tax burden.
At Quartermaster Tax, we’ve helped hundreds of business owners claim the R&D Credit and turn everyday improvements into meaningful cash flow. But with changing laws and complex rules around research and experimental (R&E) expenditures, it’s critical to understand what qualifies and how to capture every dollar you’ve earned.
Let’s break down how the R&D Credit works, who qualifies, and how the new 2025 rules under the One Big Beautiful Bill Act (OBBBA) affect your tax planning.
Are R&D Expenses Tax Deductible?
Congress provides three major tax benefits for U.S. research activities:
Immediate deduction for domestic R&E expenses under §174A
Capitalization and 15-year amortization for foreign R&E expenses under §174
A direct R&D Tax Credit under §41 for qualified research expenses (QREs)
These incentives were created to encourage U.S. innovation and keep research dollars onshore.
Domestic R&E Deductions Under §174A
Starting July 4, 2025, the One Big Beautiful Bill Act (OBBBA) permanently restored immediate expensing for domestic R&E expenditures. This means businesses can now deduct 100% of qualified R&D spending in the year it occurs — a huge win for U.S. innovation.
For 2022–2024 tax years, companies were required to amortize domestic R&E costs over five years. However, Congress included two transition options:
Deduct any unamortized 2022–2024 R&E costs entirely in 2025 (or split across 2025–2026).
Small businesses can elect to apply §174A retroactively by amending prior returns — potentially unlocking refunds now instead of spreading them out.
Foreign R&E Expenses: Still Amortized
Foreign research costs still must be capitalized and amortized over 15 years, incentivizing companies to keep innovation and experimentation within the U.S. for maximum tax advantage.
What Counts as R&D?
The IRS defines Research & Experimentation (R&E) broadly. Qualifying activities often include:
Developing or improving products, formulas, software, or equipment
Streamlining internal processes or workflows
Testing new materials or manufacturing methods
Creating prototypes, models, or technical drawings
Patent development and related attorney fees
If your business is improving how it operates — not just what it sells — you may qualify.
The R&D Tax Credit Explained
Created in 1981 to spur innovation, the R&D Credit rewards companies that expand their research efforts. Section 41 of the Internal Revenue Code allows businesses to claim a nonrefundable income tax credit based on qualified research expenses.
Originally temporary, the R&D Credit was made permanent in 2015 under the PATH Act — and remains one of the best ways to offset federal income tax liabilities.
Limitations and Coordination Rules
Businesses can claim both the §41 R&D Credit and the §174A domestic R&E deduction, but they must coordinate the two. Section 280C(c) requires that deductions be reduced by the amount of credit claimed unless the taxpayer elects to reduce the credit instead.
Bottom line: A skilled tax team can help you balance the deduction and credit for maximum benefit.
The Four-Part Test for Qualified Research
To qualify for the R&D Tax Credit, your activity must meet all four parts of the IRS test:
§174A Test:
Expenses must be eligible for a §174A deduction and conducted within the U.S.Technological Information Test:
Research must rely on the principles of physical or biological science, engineering, or computer science.Process of Experimentation Test:
The activity must involve testing, modeling, or evaluating alternatives to eliminate uncertainty.Business Component Test:
The research must relate to developing or improving a product, process, technique, formula, or software used in your business.
What Qualifies as R&D Expenses?
Qualified Research Expenses (QREs) include:
Employee Wages: If at least 80% of an employee’s work relates to qualified research, all their wages may count.
Supplies: Materials consumed during R&D projects.
Computer Costs: Time spent using computers to conduct research.
Contract Research: 65% of qualifying contractor costs may apply.
Documentation is key. Payroll records, time tracking, and project notes can make or break your claim during an IRS review.
What Does Not Qualify?
The R&D Credit does not apply to:
Research after commercial production begins
Adaptation or duplication of existing products
Market research, consumer surveys, or routine testing
Work performed outside the U.S.
Government-funded projects
Who Can Claim the R&D Credit?
It’s not just for tech or biotech firms anymore. The IRS and Treasury have broadened the scope dramatically. Businesses in industries like manufacturing, healthcare, construction, engineering, food production, and even professional services can qualify.
If you’re improving how your business operates — testing, designing, refining — you may be eligible.
Why the R&D Credit Matters in 2025 and Beyond
With major legislative changes and a renewed push for domestic innovation, the R&D Credit is becoming even more valuable. For many businesses, it’s the difference between a cash-flow crunch and a strategic growth opportunity.
Quartermaster Tax helps business owners identify, document, and claim the R&D Credits they’ve already earned — often uncovering tens or even hundreds of thousands in potential savings.
Don’t Leave Money on the Table
If your company has spent time improving processes, creating new products, or solving complex problems — you likely qualify for the R&D Credit.
Our team can help you uncover those opportunities and file correctly so you get every dollar you’re entitled to.
Schedule a free discovery call with Quartermaster Tax to learn how much you could recover this year.