Yes, there are currently 38 states that recognize the R&D tax credit. These states typically follow the IRS’s guidelines on qualified research expenditures (QREs) — with some exceptions. Fortunately, state R&D tax credits may be combined with federal R&D tax credits. When you work with us, we consider state and federal tax incentives during initial discovery.

There is no cap on the amount your business can claim in R&D tax credits. Since R&D tax credits are determined by the size and scale of your business’s technical activities — the more you spend, the more you save. Most businesses recover about 10% of their qualified R&D tax credit expenditures.

Examples of technical activities that qualify for the R&D tax credit include:

• Developing Consumer Products
• Developing Software or Mobile Applications
• Developing New Processes or Techniques to Manufacture Products
• Improve the Performance, Functionality, Quality, or Reliability of Existing Products
• Designing Prototypes
• Testing Competitors’ Products
• Conducting Research that Speeds Up Your Time-to-Market
• Implementing New Process Automations
• Implementing Process Improvements that Reduce Waste or Improve Efficiency
• Developing Formula Improvements for Food, Beverage, or Chemical Applications
• Creating Patentable Products or Processes

Examples of expenditures that qualify for the R&D tax credit include:

• Employee Wages
• Consultants’ Fees
• Material Costs
• Cloud Storage Subscriptions for Testing Environments

Note that expenditures must be related to research projects conducted in the US. Expenditures made in foreign countries do not qualify.

The R&D tax credit is generally used to offset federal income taxes. If the credit is not fully utilized the year it is generated, businesses may carry it back one year for a tax refund. If excess credit is still available, businesses may carry it forward up to 20 years. Startups that are not yet profitable may apply the credit toward federal payroll taxes to offset up to $500,000 each year for up to five years (a total of $2.5 million).