Cybersecurity companies developing cryptography technologies can unlock significant tax savings through federal R&D credits. The key is understanding which cryptographic activities qualify and how to properly document them.
The Four-Part Qualifying Test
To claim R&D credits, your cryptographic work must meet four criteria:
- Eliminate Uncertainty: Address technological questions about capability or design
- Involve Experimentation: Use systematic testing to evaluate alternatives
- Be Technological: Relate to computer science, mathematics, or engineering
- Have Qualified Purpose: Aim to develop new or improved business components
Cryptographic development naturally fits these requirements due to its experimental nature and technical complexity.
Algorithm Development Opportunities
Post-Quantum Cryptography represents prime R&D territory. Developing quantum-resistant algorithms involves substantial uncertainty about mathematical approaches, security guarantees, and practical implementation. Activities include designing new encryption schemes, optimizing algorithm parameters, and testing against various attack scenarios.
Advanced Encryption Techniques like homomorphic encryption (computing on encrypted data) and zero-knowledge proofs also qualify. These involve resolving uncertainty about efficiency, security trade-offs, and real-world applicability.
Custom Protocol Development for specific use cases typically qualifies when it addresses uncertainty about security requirements, performance constraints, or interoperability challenges.
Hardware Cryptography Projects
Cryptographic Chip Development often qualifies due to the complexity of optimizing for speed, security, and power consumption simultaneously. Key areas include side-channel attack resistance, tamper-proof design, and meeting certification standards.
Hardware Security Modules (HSMs) development qualifies when creating new approaches to key management, secure storage, or cost-effective security solutions.
Implementation and Optimization Work
Even with established algorithms, significant R&D opportunities exist. For example:
Constant-Time Implementations that prevent timing attacks involve uncertainty about achieving both security and performance goals.
Multi-Party Computation Optimization addresses uncertainty in reducing communication overhead and achieving practical performance.
Distributed Cryptography implementations face uncertainty in coordinating multiple parties while maintaining security.
Documentation Requirements
Success requires proper documentation that demonstrates the four-part test:
- Technical Records: Problem descriptions, mathematical analysis, security evaluations, and performance benchmarks that clearly show the uncertainty being addressed.
- Process Documentation: Experimental methods, alternatives tested, iterative improvements, and decision rationale.
- Time Tracking: Careful separation of qualifying R&D work from routine implementation tasks.
Cryptography continues evolving rapidly, creating ongoing R&D opportunities in quantum cryptography, blockchain security, privacy-preserving technologies, and next-generation authentication systems.
Companies should recognize that cryptographic development inherently involves the technological uncertainty and systematic experimentation the IRS requires.
With proper documentation showing how activities meet the four-part test, cybersecurity companies can significantly reduce tax burden while advancing critical security capabilities.
At Leyton US, we can help you build a strong case using your existing documentation, helping you unlock that money with minimal overhead.
Reach out to one of our experts to claim R&D tax credits for your cryptography development project!
