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Businesses across various industries may qualify for the R&D Tax Credit when they invest time and resources in developing or improving products, processes, software, techniques, formulas, or inventions.
Eligible Entities
The R&D Tax Credit is generally available to C-Corporations, S-Corporations, partnerships, sole proprietors, and LLCs, provided they conduct qualified research activities and incur eligible research expenses.
Qualification is based primarily on the activities performed rather than the size, age, or industry of the business, meaning early-stage startups may also be eligible even if they are not yet profitable. A qualified small business(QSB) may be able to use the R&D credit against specified payroll taxes, subject to applicable requirements and limitations.
Tax-exempt and nonprofit organizations generally cannot directly benefit from the federal R&D tax credit, although organizations with taxable activities or related for-profit entities may have different considerations.
R&D Four-Part-Test
R&D Technical Expertise
At Leyton, we put a lot of emphasis on this part of the four-part test, since it’s often the hardest to prove, and the one where claims fall apart most often. It’s not enough to show that a project was technical or that uncertainty existed. The IRS requires that at least 80% of the research activity involved an actual process of experimentation: identifying a specific technical uncertainty, proposing one or more possible solutions, and systematically testing and evaluating those alternatives.
The challenge is that this process rarely gets written down the way the IRS expects. Engineers iterate, test, and adjust constantly, but by the time that work gets summarized for a tax filing, it often reads as “we built it and made changes until it worked,” which looks indistinguishable from routine engineering or troubleshooting. The IRS treats those very differently: real experimentation requires a documented uncertainty, defined alternatives, and an evaluation process, not just iteration.
That’s where Leyton industry-specific technical experts make the difference. Someone who understands your actual engineering, software, or product development process can identify where genuine experimentation occurred, distinguish it from routine adjustments or debugging, and document the alternatives your team actually tested. This turns day-to-day engineering work into a defensible record that meets the IRS’s process-of-experimentation standard.
Let’s Review Your R&D Project
Prefer email? Tell us about your project for a free R&D tax credit estimate and qualification review.
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Expenses
At the highest level, expenses that are includable in the R&D Tax Credit analysis are expenses directly related to R&D. Incidental or tangential expenses are not includable. The categories of expenses that are includable are:
Incentives
The R&D Tax Credit is a dollar-for-dollar credit that directly offsets your income tax or payroll tax liability, not just a deduction. Wages, contractor costs, supplies, and cloud computing expenses tied to your development work can all contribute to your credit. That frees up cash you can reinvest into hiring, new projects, or scaling your business, turning the work you’re already doing into fuel for growth. The R&D tax credit also works alongside the R&D expense deduction. Deductions and credits should be used in combination as long as you don’t double-dip. Leyton can help you choose the option that nets out best for your situation.
Disqualified Activities
Even if a project seems to pass the four-part test, certain activities are excluded by law. Here’s what each exclusion actually means in practice:
Exploring
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Our Innovation team is there to ensure your projects are seen from all perspectives and to answer all your questions and help you make the most out of your Innovation efforts