The R&D tax credit is a federal, and often state, tax credit that rewards qualifying research spend, engineering and product work that meets the IRS's four-part test, with a dollar-for-dollar credit against tax owed rather than just a deduction.
For companies using the Alternative Simplified Credit, it generally lands between 6% and 14% of qualified research expenses, depending on how many years of R&D spend the company has to base the calculation on. Qualifying expenses are mostly wages for people doing hands-on technical work: engineering, product development, testing. Sales, marketing, and routine maintenance don't count.
The credit is often left unclaimed because founders assume it's only for companies with a dedicated R&D department, but the four-part test is about the nature of the work, not the org chart. A five-person engineering team building a new product can qualify the same as a formal lab. A pre-revenue or early-revenue startup can also apply up to $500,000 of the credit against payroll tax instead of income tax, which matters since most early companies don't owe income tax yet.
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