AI-PoweredR&D Tax Credit Studies
Maximize federal and state R&D tax credits for your clients. Our comprehensive AI platform handles qualification analysis, credit calculations, and IRS-ready documentation—delivering audit-proof studies that unlock millions in tax savings.
Federal R&D Tax CreditComplete Guide (IRC Section 41)
The Research and Development Tax Credit, codified under Internal Revenue Code Section 41, is a dollar-for-dollar tax incentive designed to encourage American businesses to invest in innovation. Originally enacted as part of the Economic Recovery Tax Act of 1981, the credit was made permanent by the Protecting Americans from Tax Hikes (PATH) Act of 2015.
History & Background
1981: R&D credit created (ERTA)
1986: Alternative Incremental Research Credit added
2007: Alternative Simplified Credit (ASC) introduced
2015: PATH Act makes credit permanent
2016: Payroll tax offset for startups begins
2022: R&D amortization requirement (Section 174)
Who Qualifies?
Any business that develops or improves products, processes, software, or formulas may qualify, including:
- C-corporations and S-corporations
- Partnerships and LLCs
- Sole proprietorships
- Startups (payroll offset)
Credit Value
The federal R&D credit typically yields:
The Four-Part Test (IRC Section 41(d))
For an activity to qualify for the R&D tax credit, it must satisfy all four parts of the following test. This is the foundation of every R&D tax credit study and the primary focus during IRS examinations.
1. Permitted Purpose (Section 41(d)(1)(B)(i))
The activity must be undertaken to create new or improved functionality, performance, reliability, or quality of a business component (product, process, formula, invention, technique, or software).
- Designing a new product feature
- Improving manufacturing efficiency
- Enhancing software performance
- Developing new formulations
2. Technological in Nature (Section 41(d)(1)(B)(ii))
The activity must fundamentally rely on principles of the physical sciences, biological sciences, engineering, or computer science.
- Engineering analysis
- Software development
- Chemical formulation
- Biological research
3. Elimination of Uncertainty (Section 41(d)(1)(B)(iii))
There must be technological uncertainty at the outset regarding capability, method, or appropriate design of the business component.
- Uncertainty about feasibility
- Unknown optimal design
- Performance outcome questions
- Method effectiveness uncertainty
4. Process of Experimentation (Section 41(d)(1)(C))
Substantially all activities must constitute a process of experimentation—evaluating alternatives through systematic trial and error, modeling, simulation, or testing.
- Prototype development
- Testing iterations
- Simulation modeling
- Design alternatives evaluation
Qualified Research Expenses (QREs)
Wages (IRC 41(b)(2)(A))
W-2 wages for employees directly engaged in, supervising, or supporting qualified research activities. Typically 65-70% of total QREs.
Supplies (IRC 41(b)(2)(B))
Tangible property (other than land, improvements, or property subject to depreciation) used and consumed in qualified research.
Contract Research (IRC 41(b)(3))
65% of amounts paid to third parties for qualified research performed on behalf of the taxpayer. Must be research conducted in the U.S.
Basic Research Payments (IRC 41(e))
Payments to qualified organizations (universities, research consortiums) for basic research. 100% included.
Excluded Activities (Section 41(d)(4))
The following activities are specifically excluded from the R&D credit:
Federal CreditCalculation Methods
Three calculation methods are available. Our platform evaluates all three to maximize your clients' benefit.
Regular Credit (RC)
Companies with consistent R&D history and strong base period
- Highest potential credit rate
- Best for mature companies
- Rewards R&D growth
- Requires historical data
- Complex calculation
- Base amount considerations
Alternative Simplified Credit (ASC)
Companies with fluctuating R&D or limited history
- Simpler calculation
- No gross receipts needed
- Good for new R&D programs
- Lower rate than RC
- Three-year lookback required
- Limited benefit in year one
Payroll Tax Offset
Pre-revenue startups with R&D expenses
- Immediate cash benefit
- Offsets payroll taxes
- Available pre-revenue
- $5M gross receipts limit
- Five-year limitation
- No prior gross receipts allowed
State R&D Tax Credits40+ States Offer Additional Benefits
Beyond the federal credit, over 40 states offer their own R&D tax incentives. Combined federal and state credits can return 10-30% of qualified research expenses. Our platform automatically calculates credits for all applicable jurisdictions.
Complete State R&D Credit Reference
| State | Credit Rate | Refundable? | Carryforward | Key Notes |
|---|---|---|---|---|
| AZArizona | 24% | Yes | 15 years | Refundable for small businesses |
| CACalifornia | 24% | No | Indefinite | Largest state R&D credit program |
| COColorado | 3% | No | Indefinite | Enterprise zone bonus available |
| CTConnecticut | 6% | Yes | 15 years | Refundable for companies <$70M |
| DEDelaware | 10% | No | 15 years | Additional credit for increased R&D |
| FLFlorida | 10% | No | 5 years | Corporate income tax credit |
| GAGeorgia | 10% | No | 10 years | Job tax credit bonus available |
| HIHawaii | 20% | Yes | 5 years | Highest rate, refundable |
| IDIdaho | 5% | No | 14 years | Above $500K QREs: 4% |
| ILIllinois | 6.5% | No | 5 years | Incremental credit available |
| INIndiana | 15% | No | 10 years | One of highest state rates |
| IAIowa | 6.5% | Yes | 5 years | Supplemental credit available |
| KSKansas | 6.5% | No | 4 years | Network center credit also available |
| KYKentucky | 5% | No | 10 years | Construction credit excluded |
| LALouisiana | 30% | Yes | 5 years | Payroll credit also available |
| MEMaine | 5% | Yes | 15 years | Super credit for R&D expansion |
| MDMaryland | 10% | Yes | 7 years | Basic and growth credits |
| MAMassachusetts | 10% | Yes | 15 years | Life sciences bonus available |
| MIMichigan | 1.9% | No | 10 years | Applied to MBT liability |
| MNMinnesota | 10% | No | 15 years | First $2M at higher rate |
| MSMississippi | 2.5% | No | 5 years | Skills training credit also |
| MOMissouri | 6.5% | No | 12 years | Cap of $10M per year |
| MTMontana | 5% | No | 7 years | University research credit |
| NENebraska | 3% | Yes | 5 years | Refundable with agreement |
| NHNew Hampshire | 10% | No | 5 years | Against BPT |
| NJNew Jersey | 10% | Yes | 7 years | Technology business credit |
| NMNew Mexico | 5% | No | 3 years | Small business rate higher |
| NYNew York | 6% | Yes | 15 years | Employment component bonus |
| NCNorth Carolina | 3.25% | No | 15 years | County tier bonuses |
| NDNorth Dakota | 8% | Yes | 15 years | Automation credit also |
| OHOhio | 7% | No | 7 years | Against CAT |
| OROregon | 6.5% | No | 5 years | University partnership bonus |
| PAPennsylvania | 10% | No | 15 years | Annual cap of $55M |
| RIRhode Island | 22.5% | Yes | 7 years | High rate, some refundable |
| SCSouth Carolina | 5% | No | 10 years | Job development bonus |
| TNTennessee | 10% | No | 15 years | Against franchise/excise tax |
| TXTexas | 5% | No | 20 years | Against franchise tax |
| UTUtah | 7.5% | Yes | 14 years | Nonrefundable portion 5% |
| VTVermont | 27% | No | 10 years | Highest nominal state rate |
| VAVirginia | 15% | No | 10 years | Major R&D expenses credit |
| WIWisconsin | 5.75% | No | 15 years | Engine/energy systems bonus |
* State credit rates and provisions are subject to change. Please verify current rates with state tax authorities. Our platform maintains up-to-date state credit calculations.
Multi-State Credit Example
Software company with operations in California and Massachusetts with $2.5M in qualified research expenses:
* Example for illustration. Actual credits depend on company-specific factors, base amounts, and state apportionment.
State Credit Considerations
Nexus Requirements
Companies must have tax nexus in a state to claim its R&D credit. Remote employees may create nexus.
Apportionment
Multi-state companies typically apportion QREs based on payroll, property, or sales factors.
Refundability
Some states offer refundable credits (immediate cash) while others are non-refundable (reduce tax liability).
Carryforward Periods
Unused credits can often be carried forward. Periods range from 3 years to indefinite depending on state.
Annual Caps
Some states cap total R&D credits awarded statewide or per taxpayer. Early filing may be advantageous.
Industries That Qualify forR&D Tax Credits
R&D tax credits aren't just for labs and tech companies. If your clients are solving problems, improving products, or developing new processes, they likely qualify.
Software & Technology
- Application development
- Cloud infrastructure
- AI/ML development
- Cybersecurity solutions
Manufacturing
- Process automation
- Quality improvements
- New product development
- Tooling design
Life Sciences
- Drug development
- Medical devices
- Clinical trials
- Formulation R&D
Engineering
- Product design
- CAD/CAM development
- Testing & simulation
- Prototype development
Aerospace & Defense
- Systems integration
- Avionics development
- Materials research
- Compliance engineering
Healthcare
- Medical software
- Treatment protocols
- Equipment development
- Telehealth systems
Automotive
- EV development
- Safety systems
- Emissions reduction
- Connected vehicles
Construction
- Green building methods
- Structural innovations
- Material testing
- Safety systems
Agriculture
- Crop development
- Equipment innovation
- Sustainability research
- Processing improvements
Food & Beverage
- New formulations
- Shelf life extension
- Process optimization
- Packaging innovation
Consumer Products
- Product development
- Material innovation
- Manufacturing processes
- Quality improvements
Telecommunications
- Network development
- 5G/6G research
- Infrastructure
- IoT solutions
Complete R&D Tax CreditPlatform Features
Our AI-powered platform handles every aspect of R&D tax credit studies—from initial qualification through IRS defense.
AI Qualification Analysis
Our AI analyzes project descriptions, engineering documents, and financial data to automatically identify qualifying R&D activities using the four-part test.
- Natural language processing
- Technical uncertainty detection
- Automatic categorization
- Confidence scoring
Credit Calculation Engine
Automatically calculate federal and state R&D credits using regular, alternative simplified, and startup methods—optimizing for maximum benefit.
- Multi-method comparison
- State credit optimization
- ASC 740 impact analysis
- Carry-forward tracking
Employee Survey System
Digital survey platform with smart questionnaires that guide employees through time allocation and project contribution documentation.
- Smart questionnaires
- Time allocation capture
- Mobile-friendly interface
- Automated reminders
Document Analysis AI
AI-powered document extraction that pulls qualifying information from project files, emails, specs, and contracts.
- OCR for all formats
- Semantic understanding
- Key data extraction
- Evidence linking
Contemporaneous Documentation
Generate IRS-compliant documentation packages with detailed project narratives, calculations, and supporting evidence.
- IRS audit-ready format
- Automatic narratives
- Evidence indexing
- Version control
Audit Defense Package
Complete audit defense documentation including technical summaries, calculation support, and interview preparation materials.
- Defense strategies
- Response templates
- Technical summaries
- Expert witness support
R&D StudyPricing Plans
Flexible pricing options for CPA firms. Use our platform yourself or let Aura AI handle the entire study.
Self-Service Platform
CPA firm licenses software and completes the study
Flat fee per study
Includes one state credit
- Full platform access
- AI qualification analysis
- Employee survey system
- Credit calculations
- IRS-ready documentation
- Form 6765 preparation
- Email support
Flat fee per study
Additional states: +$300
- Everything in Small Business
- Multi-state optimization
- Enhanced documentation
- ASC 740 impact analysis
- Priority support
- Audit defense materials
- Calculation workpapers
Comprehensive federal study
Each state: +$500
- Everything in Mid-Market
- Dedicated study manager
- Custom report branding
- Multi-entity support
- Phone support
- Expert consultation
- White-glove onboarding
Aura AI Completes Your Study
We handle everything—your client just provides access to data
* Self-service pricing requires annual platform license. Contact us for volume discounts and enterprise pricing.
* Full-service audit protection covers IRS and state examinations for the credit year studied. Additional years available at discounted rates.
R&D Tax CreditIndustry Statistics
Key statistics about the federal and state R&D tax credit programs.
Frequently AskedQuestions
What is the R&D tax credit worth?
The federal R&D credit typically equals 6-7% of qualified research expenses using the ASC method, or up to 20% using the regular credit method. Combined with state credits (where available), businesses can recover 10-30% of their R&D spending.
Can startups claim the R&D credit?
Yes! The PATH Act of 2015 allows qualified small businesses (gross receipts under $5 million with no gross receipts prior to 5 years ago) to apply up to $500,000 of R&D credits against payroll taxes annually. This provides immediate cash benefit even for pre-revenue companies.
What activities qualify for the R&D credit?
Qualifying activities must meet the four-part test: 1) Permitted purpose (new/improved product, process, software, etc.), 2) Technological in nature (based on hard sciences), 3) Elimination of uncertainty (technical challenges exist), and 4) Process of experimentation (systematic trial and error).
How far back can I amend returns to claim R&D credits?
You can generally amend returns up to 3 years from the filing date (or 2 years from payment date). Many states have different lookback periods. Our platform can help identify credits for prior years.
Is the R&D credit refundable?
The federal credit is generally non-refundable but can be carried forward for 20 years. However, qualified small businesses can offset payroll taxes. Some states (Arizona, Hawaii, Louisiana, etc.) offer refundable state R&D credits.
What documentation is required for an R&D credit study?
Key documentation includes: project descriptions, employee time records, payroll data, general ledger detail for supplies and contracts, organizational charts, and contemporaneous records showing the four-part test is met for each project.
How long does an R&D study take?
Using our AI-powered platform, most studies complete in 4-8 weeks (vs. 3-6 months manually). Timeline depends on company size, number of projects, and data availability.
What triggers an IRS audit of R&D credits?
Common triggers include: large or rapidly increasing credits, credits relative to company size, first-time claims, and inadequate documentation. Our platform creates contemporaneous, audit-ready documentation to minimize risk.
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