R&D Tax Credits.
Which parts of a software project may qualify, which costs may count, and what evidence to keep.
Which parts may qualify for R&D tax credits?
The credit applies to specific technical work, not the project as a whole. A strong candidate starts with a genuine technical unknown and compares different ways to solve it. Using AI alone does not make the work qualified research.
Separate routine work from experimental work.
Routine configuration, data migration, known integrations, maintenance, bug fixes, and work done after launch. The IRS also excludes copying an existing business function or adapting an existing product to one customer's needs.
A defined part of the system where the team did not know which technical approach would work and tested alternatives. For example, an AI assistant may qualify when making it safe and reliable requires genuine technical experiments.
The work has to pass four tests.
Employing developers or using AI is not enough. The work generally has to meet all four requirements.
A permitted purpose
The work aims to create or improve a product, process, technique, formula, invention, or piece of software. Routine maintenance and cosmetic changes are weak candidates.
Based in hard science
The work relies on principles from computer science, engineering, or another hard science. A business goal by itself is not enough.
A real technical unknown
At the start, the team does not know whether or how it can achieve the result. The unknown can involve capability, method, or design.
A process of experimentation
The team compares possible solutions through prototypes, tests, trials, modeling, or another systematic process. Failed experiments can still count as evidence.
Software built for finance, HR, sales, or operations may have to clear a higher bar. The company may need to show a major and financially meaningful improvement, real financial risk caused by the technical unknown, and no suitable commercial software that could work without major changes.
The credit applies to qualified expenses, not the full budget.
Employee wages
The share of US employee wages spent on qualified research, direct supervision, or direct support may count.
Outside contractors
Federal rules generally include 65% of qualified contractor costs. The location of the work, who bears the financial risk, and which rights the company keeps all matter.
Supplies and computing
Some supplies and rented computing used directly in qualified research may count. Ordinary production and operating costs generally do not.
The podcast uses about 10% of qualified spending as a rough example, not a standard rate. The actual federal credit depends on current and prior research expenses, the calculation method, and applicable limits.
Set up the evidence before tax season.
- 01Name the part of the business being improved and the technical unknown before development begins.
- 02Keep design notes, prototypes, test results, rejected approaches, tickets, and release records.
- 03Track qualified time by project, including direct supervision and support, using one consistent method.
- 04Make contracts clear about ownership rights, payment terms, financial risk, and where each contractor works.
- 05Have the tax adviser review the project and contract early enough to correct gaps while the work is still happening.
The credit generally reduces income tax, subject to its final calculation and the broader rules for business tax credits.
Some startups may apply up to $500,000 of the credit against payroll taxes. Ask a tax adviser about eligibility and timing before filing the return.
For tax years beginning after 2025, Form 6765 generally requires more detail about each area of research, with exceptions for some smaller filers. This is educational, not tax or legal advice. A qualified tax adviser should decide what applies to your company and tax year.