Everything You Should Know About R&D Tax Credits in the U.S.

Bringing new ideas to life takes time, effort, and money. Whether you're refining a product, testing design alternatives, or improving processes, the costs add up fast.

The good news is that you don’t have to carry that financial burden alone. R&D tax credits let you reclaim a portion of your spending to help you reinvest in future projects. Yet, many businesses miss out due to common misconceptions about eligibility or complexity.

In this guide, you’ll learn exactly how to reduce your income tax liability, claim your share, and keep more cash in your business without drowning in paperwork. 

Let's get started.

What Is the R&D Tax Credit in the U.S.?

The R&D tax credit is a federal tax incentive that gives you a dollar tax credit – a dollar-for-dollar reduction on your taxable income – when you invest in qualified R&D expenses. Whether you’re improving a product, refining manufacturing processes, or tackling technological uncertainties, this credit helps lower your costs while driving innovation through eligible R&D activities.

The Tax Cuts and Jobs Act (TCJA) of 2017 reshaped how you claim this credit. It lowered corporate tax rates, changed tax credit calculations, and introduced new rules requiring you to amortize certain development tax credits over time instead of deducting them immediately.

All of this ties into Section 174, which now mandates that you spread your Qualifying expenses over five years (or 15 years for foreign research). This change impacts your annual tax return and cash flow, making accurate financial records essential for claiming your payable tax credit and reducing business activities overhead.

This leads us to our next question.

Who Qualifies for the R&D Tax Credit in the U.S.?

If your company spends time and money on projects in science, engineering, or tech, you may be eligible for the R&D tax credit services. Not every initiative qualifies, though – only those that meet IRS standards and demonstrate a clear advance in science, whether in physical sciences or applied engineering. This credit can even apply to businesses making a payroll tax election, allowing you to apply the benefit to a portion of payroll taxes.

Four-Part Test

To qualify, your research must meet these four IRS-defined requirements:

1. Permitted purpose: Your work must focus on the improvement of products, processes, software, or techniques. The goal should be to enhance function, reliability, or quality.
2. Elimination of uncertainty: You must attempt to solve a technical challenge where the outcome isn't immediately clear.
3. Process of experimentation: Your research must involve testing different design alternatives through trial and error, modeling, or simulations.
4. Technological in nature: Your work should rely on engineering, software development, or biological sciences, not just business strategy or aesthetics.

Eligible Industries

Many industries benefit from the R&D tax credit as long as they engage in qualified research activities. Here are some R&D tax credit examples in the U.S.:

• Software development: Creating or improving applications, cybersecurity systems, or AI-driven solutions.
• Manufacturing: Enhancing production methods, testing raw materials, or increasing team efficiency.
• Biotechnology and life sciences: Developing pharmaceuticals, medical devices, or conducting lab research.
• Engineering and architecture: Designing innovative structures, materials, or energy-efficient solutions.
• Aerospace and automotive: Advancing fuel efficiency, safety systems, or autonomous technology.

What Costs Can Be Claimed for the U.S. R&D Tax Credit?

You can claim qualified research expenses that directly support qualified research activities under the R&D tax credit. These include:

• Employee wages: If your team works on development activities, testing, or supervising R&D, a portion of their salaries qualifies. This includes engineers, software developers, and technical staff.
• Contractor expenses: You can claim 65% of what you pay third-party contractors for conducting research. However, you must retain economic risk and ownership of the research results.
• Materials and supplies: Any materials used in building prototypes, testing, or experimentation count as eligible costs as long as they are consumed during research.
• Cloud Computing and server costs: If you use cloud computing for development, simulations, or large-scale data testing, these costs may qualify.

Tracking every R&D-related dollar allows you to lower your federal income tax liability and reinvest more into innovation.

Federal R&D Tax Credit Rates & Limits in the U.S.

IRC Section 41, also known as the Credit for Increasing Research Activities, provides businesses with an income tax credit for expanding their research efforts. In most cases, the credit equals 20% of the amount by which the taxpayer's qualified research expenses (QREs) for the year exceed a calculated base amount.

However, there are a few key things to know about federal limits and how the credit is calculated. For example, the percentage of eligible R&D expenses you can claim depends on the calculation method you use. 

The Alternative Simplified Credit (ASC) method allows businesses to claim 14% of their R&D spending that exceeds 50% of their average over the past three years. If no prior-year data exists, the claimable percentage is 6% of current-year expenses. The Regular Research Credit (RRC) method offers a 20% credit on qualified R&D spending that exceeds a calculated base amount.

Besides, if you run a startup with less than $5 million in revenue, you can apply for up to $500,000 per year of your R&D tax credit toward payroll taxes instead of waiting to become profitable. This can free up cash when you need it most.

Tracking your R&D spending properly ensures you don’t leave unclaimed credits behind.

State-Level R&D Tax Credits in the U.S.

Many states offer R&D tax credits that work alongside federal incentives to give you additional savings. Some states also allow credit carryforwards to help you maximize your potential savings over time.

According to the KBKG, here's which states offer R&D tax credits in the U.S.:

Here’s a quick overview of which states provide these tax credit opportunities and how they can supplement federal credits. This will help you maximize your cash payments and, therefore, your return on investment.

Arizona:
• 24% of QREs up to $2.5M
• 15% for QREs exceeding $2.5M
• Refundable portion up to 75% for small businesses (<150 employees) with pre-approval

Delaware:
• 10% of QRE increase over base amount or 50% of Delaware’s share of federal credit
• 20%/100% for small businesses (<$20M gross receipts)
• Fully refundable

Illinois:
• 6.5% of QREs exceeding base amount
• Not refundable, carry forward up to 5 years

Louisiana:
• 30% for <50 employees, 10% for 50–99, 5% for 100+
• 30% for SBIR/SBTT grants
• Carry forward 5 years; SBIR/SBTT credits are transferable

Minnesota:
• 10% of first $2M in QREs, 4% for excess
• Non-refundable, carry forward up to 15 years

New Mexico:
• 5% of QREs; 10% in rural areas
• Additional 5% for payroll date increase
• Carry forward up to 3 years; applies to businesses with ≤50 employees and ≤$5M expenditures

Rhode Island:
• 22.5% of first $111,111 in QREs, 16.9% above
• 5% for pre-1998 expenses
• Cannot reduce below minimum tax, carry forward up to 7 years

Wisconsin:
• 5.75% of QREs exceeding 50% of 3-year average
• 2.875% if no prior QREs
• Internal combustion/energy-efficient: 11.5% / 5.75%
• Up to 25% refundable, carry forward up to 25 years

Arkansas:
• 20% credit on QREs exceeding base for 3 years
• 33% credit for strategic areas up to $50,000/year
• Non-refundable, carry forward up to 9 years

Florida:
• 10% of increased R&D or 50% of Florida’s share of federal credit (ASC method)
• Annual cap $9M
• Application window: March 20–26, 2025 (for 2024 expenses)
• Not refundable, carry forward

Indiana:
• 15% on first $1M increase in QREs, 10% thereafter
• Alternate 10% for aerospace or no prior QREs
• Carry forward up to 10 years; 100% sales tax exemption for R&D equipment

Maine:
• 5% of QREs exceeding base + 7.5% of basic research payments
• Non-refundable, carry forward up to 15 years

Missouri:
• 15% of QRE increase, 20% with college/university research
• Non-refundable, carry forward up to 10 years (effective from 2023)

New York:
• 15% for ≥10 employees, 20% for <10
• Refundable up to $500,000/year for 3 consecutive years
• Certification required

South Carolina:
• 5% of QREs incurred in SC
• Cannot exceed 50% of tax liability
• Carry forward up to 10 years

California:
• 15% of QREs exceeding base + 24% of university research payments
• Not refundable, carry forward indefinitely

Georgia:
• Based on increase in R&D spending
• Offsets up to 50% of net GA income tax liability
• Carry forward up to 10 years; can offset payroll withholding taxes

Iowa:
• Varies by industry (manufacturing, life sciences)
• Refundable or carry forward
• Ag/finance/real estate/retail not eligible

Maryland:
• 10% of QREs over Maryland Base Amount
• Cap: $12M/year, $250,000/business
• $3.5M reserved for small businesses
• Refundable for small businesses, available through June 30, 2027

Nebraska:
• 15% of federal credit for in-state expenses
• 35% for college/university research
• Refundable, can offset income or sales/use tax

North Dakota:
• 25% of first $100,000 in QREs, 8% beyond
• Alternate: 17.5% of first $100,000, 5.6% beyond
• Carry back 3 years, forward 15
• Small businesses can sell/transfer up to $100,000

Texas:
• Franchise tax credit based on QREs or sales tax exemption
• Choice per tax year
• Must file Long Form Franchise Tax Report or Annual Info Report by March 31

Colorado:
• 3% of QRE increase over previous 2 years
• Only for businesses in enterprise zones
• Non-refundable, carry forward indefinitely

Hawaii:
• % of federal credit, capped at $5M/year
• Available through Dec 31, 2029
• Certification required; first-come, first-served

Kansas:
• 10% of QRE increase over avg. of current + previous 2 years
• Non-refundable, carry forward in 25% increments
• Transferable from 2023

Massachusetts:
• Cannot reduce liability below $456
• Limited to $25,000 excise + 75% of remainder
• Carry forward 15 years; excess credits under 75% rule carry forward indefinitely

New Hampshire:
• 10% of QRE increase over base
• Cap: $7M/year, $50,000/business
• Non-refundable, carry forward 5 years; prorated if over cap

Ohio:
• 7% of net excess QREs over 3-year average
• Non-refundable, carry forward 7 years
• Offsets Commercial Activity Tax

Utah:
• 5% of QREs exceeding base
• 5% of basic research payments
• 7.5% of current-year QREs
• First two: carry forward 14 years; 7.5% is not carried forward

Connecticut:
• 6% for small businesses (<$100M gross income)
• Tiered 1%–6% for larger businesses
• Small businesses (<$70M income, no tax liability) can exchange for 65% refund
• Carry forward up to 15 years (indefinitely for pre-2021 credits)

Idaho:
• 5% of QREs incurred in Idaho
• Carry forward up to 14 years

Kentucky:
• 5% of qualified costs for R&D facility construction/remodeling/equipment
• Non-refundable, carry forward up to 10 years

New Jersey:
• 10% of eligible research expenses
• Non-refundable, carry forward 7–15 years depending on business type

Pennsylvania:
• 10% for most businesses, 20% for qualified small businesses
• Cap: $55M/year ($11M reserved for small businesses)
• Non-refundable, carry forward 15 years
• Credits can be sold/transferred

Vermont:
• 27% of federal R&D credit
• Carry forward up to 10 years
• Applies to personal, business, and corporate income tax

Virginia:
• Minor: 15% of first $300,000 in QREs over base (20% w/ university), refundable
• Major: 10% of excess QREs, non-refundable
• Minor: ≤$5M QREs, Major: >$5M
• Carry forward 10 years
• Application deadline: Sep 1, 2025

How to Claim the R&D Tax Credit in the U.S.?

Claiming the R&D tax credit can reduce your tax bill and free up cash for future innovation, but the process requires careful planning. Here’s how you can successfully claim your credit and maximize your savings.

Step 1: Identify R&D Activities Using the Four-Part Test

First, confirm that your work meets the IRS Four-Part Test. To qualify, your research must follow IRS guidelines, which focus on purpose, uncertainty, experimentation, and technology.

Before applying, you should review your projects and document how they meet these criteria. Keeping clear records of your qualified research activities from the start will make the claim process much smoother.

Step 2: Gather Financial and Technical Documentation

To claim your credit, you need adequate documentation of your research activities. You should collect:

• Payroll records showing wages for employees working on R&D.
• Expenses for supplies, business records, and contractor payments.
• Technical documents like research reports, prototypes, and test results.

Step 3: File IRS Form 6765 (Credit for Increasing Research Activities)

You must complete IRS Form 6765 when filing your income tax return. This form lets you calculate your credit using either the regular credit method or the simplified credit method.

Step 4: Apply Credits Against Payroll Taxes (If Applicable)

Remember that if you run a startup with less than $5 million in revenue, you can use up to $500,000 of your R&D tax credit to offset payroll taxes. This can provide immediate cash flow relief, which will allow you to reinvest in growth while reducing your payroll tax burden.

​To qualify, you must have less than $5 million in gross receipts for the current tax year and must not have had gross receipts for more than five years, including the current year. ​

For companies that exceed these thresholds, the R&D tax credits can still be utilized, but they are applied against income tax liabilities rather than payroll taxes. If the company does not have sufficient income tax liability to utilize the credits in the current year, the unused credits can generally be carried forward to offset income tax liabilities in future years.

What’s the Maximum R&D Tax Credit You Can Claim in the U.S.?

There’s no strict limit on the R&D tax credit because the amount you can claim depends entirely on your qualified expenses. The more you invest in research, the higher your potential credit.

While federal credits have no cap, state-level credits vary. Some states offer higher incentives, while others have restrictions. You can check the table above to see how different states handle these business incentives.

How to Maximize Your R&D Tax Credit in the U.S.

To get the most out of your R&D tax credit, you need to stay organized and proactive. Many businesses miss out on savings simply because they don’t track their expenses properly or overlook state-level credits. Here’s how you can maximize your claim:

• Track R&D expenses in real-time: Waiting until tax season to gather records can lead to lost credits. So, you should keep detailed records of wages, supplies, and contractor costs as you go.
• Claim both federal and state credits: Don’t leave money on the table. Many states offer additional business incentives that stack with the federal credit that can increase your savings.
• Ensure compliance with IRS requirements: Poor documentation can lead to audit risks. You should keep organized business records, project notes, and financial data to support your claim.
• Use automation tools like Chrono Platform: With Chrono Platform, you can track qualified activities, log expenses, and generate reports that align with IRS guidelines. This makes filing your claim easier and more accurate.

Streamline Your R&D Tax Credit Claims in the U.S.

Handling R&D tax credits can be overwhelming, but Chrono Platform makes it easy. You don’t have to dig through paperwork or worry about missing details because Chrono automatically tracks qualified research activities and organizes your expenses in real-time.

It generates IRS-compliant reports and ensures your claims are accurate and audit-ready. If you're a startup, Chrono can help you apply payroll tax offsets so you can free up cash when you need it most.

Stop wasting time on manual calculations and let Chrono Platform simplify the process so you can focus on innovation. Start optimizing your R&D tax credits today!