The R&D tax credit, explained.
One of the largest incentives in the tax code, and the custom software and AI we build for clients is exactly the kind of work it rewards. Here is how it works, what it pays, and why your build qualifies.
A credit, not a deduction. That distinction is the whole point.
A deduction shaves your taxable income. A credit cuts your tax bill dollar for dollar. On the same $100,000 of qualified work:
saved, because it only lowers the income you are taxed on (at a 21% corporate rate).
off the tax you owe, dollar for dollar. The R&D credit (IRC Section 41) is a permanent credit, not a deduction.26 U.S.C. 41
Does your work qualify? It comes down to four questions.
The IRS applies a four-part test to each product, process, or piece of software. Meet all four and the activity counts. It is about the work, not your industry or size.IRS ATG
The work aims to create or improve a product, process, or software: its function, performance, reliability, or quality.
It relies on hard science: engineering, physics, chemistry, biology, or computer science. It doesn't have to be brand-new to the world.
At the start, you didn't know if you could build it, or how. There was a real technical question to resolve.
You worked through it systematically: hypotheses, alternatives, testing and refining. Trial and error, not a known recipe.
The software we build checks every box.
When we build custom AI and software inside your business, the work maps to all four parts of the test by design, not by luck.
Every system we build is a new or improved software component for your business, better function, performance, and reliability.
It is software and AI engineering end to end, grounded in computer science, the exact hard-science basis the test asks for.
Custom work exists because the answer is not off the shelf. We resolve real unknowns in your data, integrations, and model behavior.
We work in prototypes, evaluations, and iteration, testing approaches and refining until it runs. That is the process, documented as we go.
What counts as a qualified expense
Building software and AI systems is squarely in scope.Pay for people who do, supervise, or directly support the research.
Materials consumed in the work (not equipment or overhead).
65% of what you pay outside contractors for qualifying work.
Renting servers and GPUs (AWS, Azure, GCP) used for R&D.
Wages, supplies, and cloud costs count in full; outside contractors count at 65%.IRS QREs
What it is actually worth.
Roughly 6 to 10% back
As a rule of thumb, the federal credit returns about 6 to 10 cents on every qualified dollar, depending on the method used and your spending history. It is calculated one of two ways (a 20% regular credit or a simpler 14% method), and it varies by company.Moss Adams
Startups: cash now, no profit needed
A young company (under $5M in gross receipts, generating revenue five years or less) can apply up to $500,000 a year against its payroll taxes, even with no income-tax bill yet. Real cash back while you are still pre-profit.IRS
Immediate R&D expensing is back for good, and there is a backlog to clear.
From 2022, companies had to spread R&D costs over five years instead of deducting them right away. The One Big Beautiful Bill Act (July 2025) reversed that for domestic research, restoring immediate expensing permanently for tax years starting after 2024.Grant Thornton
Any leftover domestic R&D costs you capitalized in 2022 to 2024 can be written off in a single catch-up deduction, taken all at once on your 2025 return or split across 2025 and 2026. The election rides on your timely-filed 2025 return, so extensions still leave the door open.BDO
Then there is your state.
Most states add their own R&D credit on top of the federal one. Tap See the options in your state at the bottom of the screen and pick yours.
Where we work.
We build and run production systems for clients across the country, the kind of technical work that generates qualifying activity.
We are not your accountant. We are the reason the credit exists.
The custom AI and software we build for clients is, by its nature, the experimental technical work the credit rewards. We document that work as we go, so your tax team has what it needs to substantiate the claim, and we partner with credit specialists who do this every day.
This page is educational and is not tax, legal, or accounting advice. The rules change and the specifics depend on your situation. Figures are general rules of thumb, not a promise of any outcome. Confirm eligibility and amounts with a qualified tax professional.