R&D Tax Credit for Technology Companies

January 8, 2026

By: Matthew Barbieri

Partner, Advisory

Key Takeaways

You can now immediately deduct domestic R&D expenses starting in 2025 under new Section 174A rules (finally)
Small tech companies can retroactively apply these rules to 2022-2024 if you have average annual gross receipts under $31 million
The R&D tax credit offers up to 10% back on qualifying expenses including engineer salaries, supplies, and contract research
Software development explicitly qualifies for both immediate deductions and the research credit
You must pass a four-part test to claim the credit—it’s not just “we tried some stuff and it didn’t work”

If you’re building software, developing algorithms, or generally spending money to make things that don’t exist yet, congratulations—you might qualify for the R&D tax credit. And if you’ve been ignoring it because you assumed it was only for biotech firms with lab coats and beakers, you’ve been leaving money on the table.

The research and development tax credit isn’t new. It’s been around since 1981, encouraging companies to innovate domestically rather than outsourcing to countries with more favorable tax treatment. But recent legislative changes have made it significantly more valuable for technology companies, particularly startups that are burning through cash faster than they’re generating revenue.

Here’s what you need to know about claiming the R&D tax credit without ending up on the wrong side of an IRS audit.

Understanding What Actually Qualifies as R&D

The IRS doesn’t hand out tax credits for vague claims of “innovation” or “disruption.” Your activities must meet a four-part test, and you need documentation to prove it. Not aspirational PowerPoint decks—actual evidence.

Permitted Purpose

Your research must aim to create or improve a business component’s function, performance, reliability, or quality. This includes products, processes, techniques, formulas, inventions, or software—small incremental improvements count. You don’t need to be curing cancer; you just need to be solving a technical problem that doesn’t have an obvious solution.

Technological in Nature

Your work must rely on hard science principles—engineering, computer science, physics, biology, or chemistry. The “technology” in your company name doesn’t automatically qualify you. Building a new marketing funnel? Not qualifying and developing a novel algorithm to optimize that funnel’s performance? Potentially qualifying.

Eliminating Uncertainty

You must intend to eliminate technical uncertainty about methodology, capability, or appropriate design. If you already know how to do something and you’re just executing, that’s not research—that’s production. The uncertainty must be technological, not commercial. “Will customers buy this?” isn’t qualifying uncertainty. “Can we make this work within our performance constraints?” is.

Process of Experimentation

You must systematically evaluate alternatives using modeling, simulation, or trial-and-error. This means you tried multiple approaches, documented what worked and what didn’t, and iterated based on results. Accidentally stumbling upon a solution doesn’t count, even if the result is brilliant.

What Expenses Actually Qualify

The R&D tax credit covers qualified research expenses, which include more than you might think but less than aggressive promoters claim.

Wages represent the largest category of qualifying expenses. This includes salaries for engineers, developers, scientists, and even certain support staff who directly contribute to research activities. First-line supervisors count. The CEO who occasionally reviews code doesn’t, unless they’re legitimately spending substantial time on technical work.

Here’s where it gets interesting: If at least 80% of an employee’s time qualifies as research activities, you can claim their entire salary as a qualifying expense. Below that threshold, you need to track and allocate time more carefully.

Supplies used in research qualify, including prototype materials and engineering software licenses. Your AWS bills for development environments? Potentially qualifying. Your Salesforce subscription? Not qualifying.

Contract research performed on your behalf in the United States qualifies, subject to certain limitations. If you’re outsourcing development work to contractors, keep detailed records of what they’re working on and how it relates to qualified research.

The Game-Changing Payroll Tax Election

Most technology startups operate at a loss for years before becoming profitable. The traditional R&D tax credit offsets income tax liability—which doesn’t help if you’re not paying income tax yet.

Enter the payroll tax election, which allows qualified small businesses to apply up to $500,000 of R&D credits against employer-side payroll taxes instead of income taxes. This provides immediate cash benefits when you need them most.

To qualify, your company must have gross receipts of less than $5 million for the election year and be within five years of your first revenue. This isn’t five years from incorporation—it’s five years from when you started generating any receipts at all.

The credit can offset both the employer portion of Social Security and Medicare taxes (the full 7.65% FICA obligation), not just Social Security. For startups with significant engineering payroll, this can free up substantial cash.

Recent Legislative Changes That Actually Matter

After years of requiring businesses to capitalize and amortize R&D expenses over five years—a change that everyone in the technology sector rightfully despised—Congress finally restored immediate deductions for domestic research expenditures.

The One Big Beautiful Bill Act introduced Section 174A, which allows businesses to immediately deduct domestic R&D expenses starting with tax years beginning after December 31, 2024. This reverses one of the most criticized aspects of the Tax Cuts and Jobs Act and provides the cash flow relief that technology companies need to fund innovation.

Even better, small businesses with average annual gross receipts under $31 million can retroactively apply these rules to tax years 2022-2024 by amending returns. If you’ve been capitalizing R&D expenses for the past few years, you might be sitting on significant refund opportunities.

Foreign R&D expenses continue to be subject to 15-year amortization, creating a clear incentive to conduct research domestically. If you’ve been offshoring development work primarily for cost savings, the tax implications just got more complicated.

Documentation: The Thing Nobody Wants to Talk About

The IRS has increased documentation requirements for R&D credits, and they’re not subtle about it. Starting with 2024 tax year filings, you must identify specific projects and break out qualified research expenses by project.

This means time tracking. Yes, your developers will hate it. Yes, it’s administrative overhead. And yes, it’s absolutely necessary if you want to defend your credit during an audit.

At minimum, you need:

Lists of active research projects with technical objectives
Documentation of uncertainties and experimentation processes
Time allocation by employee and project
Records linking expenses to specific qualifying activities

Quarterly surveys capturing project activities and time allocation work better than trying to reconstruct everything at year-end. Your engineers won’t remember in December what they worked on in March, no matter how much they insist they will.

Making The R&D Tax Credit Work For Your Tech Company

The R&D tax credit represents one of the most valuable tax incentives available to technology companies. Combined with immediate expensing for domestic research under the new Section 174A rules, businesses investing in innovation can significantly reduce their tax burden while maintaining cash flow for growth.

But claiming the credit correctly requires understanding both the technical requirements and the documentation standards. The IRS has made clear that they’re scrutinizing R&D claims more closely, and aggressive positions without proper support create audit risk that isn’t worth the potential benefit.

Technology companies should work with tax advisors who understand both the software development process and the intricacies of the R&D credit regulations. You need someone who can speak both languages fluently—technical enough to understand what your engineers actually do, tax-savvy enough to properly structure and document the claim.

Ready to maximize your R&D tax benefits? Contact Wiss today to discuss how the research credit and new expensing rules can support your technology company’s growth and innovation strategy.