Owedco · Updated October 2026 · 9 min read + free checklist
Most businesses that qualify have no idea they do. The IRS definition of "research" is much broader than most people assume and the businesses that miss out are usually the ones that never bothered to check.
Quick Eligibility Check - 4 Questions
1. Does your business develop or improve any product, process, software or technique?
2. Does that work involve any technical uncertainty - problems your team had to figure out?
3. Do you employ people (W-2 or contractors) who spend time on that development work?
The IRS Four-Part Test - What Actually Determines Eligibility
The R&D tax credit under IRC Section 41 uses a specific four-part test. Every activity you want to claim must pass all four. Here's what each part actually means, with real examples of what passes and what doesn't.
1
Permitted Purpose
The work must be aimed at developing or improving a product, process, software, technique, formula or invention. The improvement needs to relate to function, performance, reliability or quality - not just aesthetics.
✓ Passes: Building a new feature, improving a manufacturing process, developing a drug compound, redesigning a component to reduce failure rate
✗ Fails: Repainting a product, changing a logo, market research, customer surveys
2
Technological in Nature
The work must rely on hard science - computer science, engineering, biology, chemistry or physics. It doesn't need to be cutting-edge; it just needs to apply scientific principles.
You must be trying to discover information that eliminates uncertainty about whether, or how, you can develop or improve something. The uncertainty must be technical - not commercial or business uncertainty.
✓ Passes: "Can we build this to handle 100k users?" "Will this compound bind to the target receptor?" "Can we hit this tolerance with this alloy?"
✗ Fails: "Will customers buy this?" "Is this market big enough?" "Which colour converts better?"
4
Process of Experimentation
You must be evaluating alternatives through a process of experimentation - testing hypotheses, trying different approaches, iterating. You don't need a formal lab. Jira tickets, GitHub branches, engineering notes and prototype iterations all count.
✓ Passes: A/B testing different architectures, trying multiple formulations, running production trials, building and abandoning approaches
✗ Fails: Following a known recipe exactly, executing a documented process with no iteration
The Key Insight Most Businesses Miss
You don't need to succeed. A failed experiment - a prototype that didn't work, a feature you abandoned, an approach that proved unviable is still qualified research. The IRS credits the process of experimentation, not the outcome.
Does Your Industry Qualify?
The credit has no industry restriction. What matters is the nature of the work, not what sector you're in. That said, some industries qualify almost universally while others rarely do.
Industry
Typical Eligibility
What Usually Qualifies
Software & SaaS
Very High
Core product development, new features, infrastructure, algorithms
Biotech & Pharma
Very High
Drug discovery, clinical work, biologics, device development
Manufacturing
Very High
Process improvement, tooling, prototypes, materials testing
Aerospace & Defence
Very High
Engineering, systems integration, materials R&D
Medical Devices
Very High
Device design, testing, regulatory-driven development
Architecture & Engineering
High
Novel design solutions, custom structural engineering, new materials use
Food & Beverage
High
New formulations, process improvement, shelf-life testing
Agriculture / AgTech
High
Crop science, precision ag software, soil technology
Construction
Moderate
Prefab systems, custom engineering solutions, new building methods
Retail / E-commerce
Low
Proprietary software or logistics tech only
Professional Services
Low
Rare - custom software tools or process automation only
The Common "No" Answers and Why They're Often Wrong
These are the five most common reasons businesses say they don't qualify and why each one deserves a second look.
?
"We're not doing real research - we just build software."
Software development is the most common qualifying activity in the US. The IRS explicitly recognises it. If your engineers solve technical problems, you likely qualify.
?
"Our CPA said we don't qualify."
Most general-practice CPAs don't specialise in R&D credits. The four-part test is nuanced and frequently misapplied. A specialist review takes 15 minutes and costs nothing unless they find something.
?
"We're not profitable yet - credits are useless to us."
Not for startups. If you're under 5 years old with under $5M revenue, you can apply up to $500,000 per year directly against payroll taxes cash money, no profit needed.
?
"We don't have documentation / lab notebooks."
GitHub commits, Jira tickets, Slack threads, engineering specs, meeting notes - this is all valid documentation. Most businesses already have what they need.
?
"We tried before and were denied."
A prior denial isn't final. If it was based on an IRS audit or a general CPA's assessment rather than a specialist study, it's worth a second look. The four-part test is regularly misapplied.
What You Actually Need to Qualify
Strip it down to the absolute minimum and you need three things:
Qualifying activity - development or improvement work that involves technical uncertainty and experimentation
US-based employees or contractors - someone whose wages or fees you can tie to that activity
Some form of documentation - records that show what you were trying to do and how you went about it
That's it. No lab required. No PhD required. No minimum company size. No minimum revenue. Sole proprietors qualify. Pre-revenue startups qualify. Businesses that have never heard of the credit qualify.
What About Company Size?
There is no minimum. A 2-person software company can claim the credit. There is a restriction at the top end - businesses with over $50M in average gross receipts over the prior 3 years cannot use the credit to offset AMT, but they can still claim it against regular income tax.
How Much Could You Get?
The credit runs at roughly 6–14% of your qualifying R&D expenses - wages, 65% of contractor costs and supplies consumed in research. For a software company with $500k in engineering payroll where 70% of time is qualifying work, that's $350k in QREs and a credit of roughly $21,000–$49,000 per year.
Run our free 6-question eligibility checker - takes 90 seconds, gives you a personalised estimate and tier rating
Use the calculator - enter your actual numbers to see the credit range before you talk to anyone
Book a free specialist review - firms like TaxTaker work on contingency (no recovery = no fee), so a 15-minute call has zero downside
Don't forget prior years - you can amend returns for the past 3 years, so if you've been qualifying without claiming, that first recovery could stack multiple years together
Find Out in 90 Seconds
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This article is for informational purposes only and does not constitute tax or legal advice. R&D credit eligibility depends on your specific activities, qualified expenses and tax situation. Always work with a qualified tax professional before filing any credit claim.