What Is the R&D Tax Credit?

The Research and Development (R&D) Tax Credit, codified under Internal Revenue Code (IRC) Section 41, is a federal incentive that allows businesses to reduce their tax liability based on qualifying research expenditures. Originally enacted in 1981 as a temporary measure, the credit was made permanent by the Protecting Americans from Tax Hikes (PATH) Act of 2015.

The credit is designed to encourage domestic innovation by rewarding companies that invest in developing new or improved products, processes, software, techniques, formulas, or inventions. It applies across nearly every industry — not just traditional "lab" R&D.

Any U.S. business that pays or incurs expenses for qualified research activities may be eligible. This includes:

• Software companies building new features or improving existing systems
• Manufacturers developing new production methods
• Engineering firms solving technical design challenges
• Startups experimenting with novel product architectures
• Agencies building custom solutions for clients

The key requirement is that the work involves resolving technological uncertainty through a process of experimentation. You don't need a lab coat — writing code that solves hard problems often qualifies.

The credit amount depends on your qualifying research expenses (QREs) and which calculation method you use:

• Regular Credit (RC): Based on the incremental increase in research spending over a base amount. The credit rate is 20% of expenses above the base.
• Alternative Simplified Credit (ASC): 14% of QREs exceeding 50% of the average QREs for the three preceding tax years. Most small-to-mid businesses use this method because it's simpler and doesn't require historical data back to 1984.

For a typical software team of 3–5 developers spending 60–70% of their time on qualifying work, the annual credit often falls between $24,000 and $60,000.

Qualified Research Expenses (QREs) under IRC Section 41 include:

• W-2 wages for employees performing or directly supervising/supporting qualified research
• Supply costs consumed in the research process
• Contract research expenses (65% of amounts paid to third parties for qualified research)

The largest component for software companies is typically employee wages. If a developer spends 70% of their time on qualifying activities, 70% of their salary counts as a QRE.

Many businesses don't claim the credit because they believe myths like:

• "We're too small to qualify." — There's no minimum company size. Even sole proprietors with W-2 wages can claim.
• "We need to be inventing something new to the world." — The IRS standard is new to the taxpayer, not new to the industry.
• "Software development doesn't count." — Software R&D is one of the most common qualifying activities.
• "The audit risk isn't worth it." — With proper contemporaneous documentation, the credit is defensible. The IRS expects taxpayers to claim it.

quarryFi automates the most painful part of claiming the R&D credit: documentation. By connecting to GitHub and supported AI coding assistants, quarryFi continuously tracks your work, classifies activities against the IRS four-part test using AI, and generates Form 6765 with supporting documentation — all without requiring you to reconstruct a year of work from memory.