What Are R&D Tax Credits?
Turn the testing, trials, and building you're already doing into a real reduction on your tax bill
Quick answer
The federal R&D tax credit reduces your tax liability dollar for dollar for wages, supplies, and contract research tied to developing or improving a product, process, or software. Farmers, agribusinesses, manufacturers, and professional service businesses across South Dakota and the greater Midwest often qualify without realizing it. TruCount CPA PC documents the four-part test and calculates both credit methods to maximize and defend your claim.
The federal Research and Development (R&D) tax credit rewards businesses for the work they're already doing: testing a new seed treatment, refining an irrigation system, developing custom software, or reworking a manufacturing process. Congress created the credit under IRC Section 41 to keep innovation happening on American soil, and South Dakota businesses can often stack a state credit right alongside it.
Here's what sets the R&D credit apart from a standard deduction. A deduction lowers your taxable income. This credit lowers your tax bill dollar for dollar. If your business spent $200,000 on qualifying wages, supplies, and contract research last year, the credit reduces what you owe the IRS directly, not just the number your tax rate gets applied to. For farmers experimenting with new hybrids or agribusinesses building custom equipment, that difference adds up fast.
Does Your Business Qualify?
Most business owners assume the R&D credit belongs to Silicon Valley. It doesn't. The IRS applies a four-part test, and if your work meets it, the label on your invoices doesn't matter.
Permitted purpose: The activity aims to develop or improve a product, process, formula, or software, whether that's a new grain bin design or a proprietary billing system.
Elimination of uncertainty: You didn't know upfront whether the approach would work, how to design it, or which method to use.
Process of experimentation: You tested, modeled, or evaluated alternatives, think field trials, prototype builds, or simulation runs.
Technological in nature: The work relies on principles of engineering, biology, chemistry, computer science, or a similar hard science.
How the R&D Credit Calculation Works
There are two ways to calculate the R&D credit, and picking the right one changes your result. The regular research credit compares your current qualified research expenses (QREs) against a base amount tied to your company's historical research spending and gross receipts, then applies a 20% rate to the excess.
The Alternative Simplified Credit (ASC) method suits smaller and mid-sized businesses better because it doesn't require decades of historical data. It looks at your average QREs from the prior three years, then applies a 14% rate to the amount your current spending exceeds half that average. If you had no qualifying research in the prior three years, a flat 6% rate applies instead.
Neither method wins automatically. The right choice depends on your spending history, your gross receipts, and how well your records support each calculation. This is where a CPA who knows your books, not just your tax return, earns their fee. We run both scenarios during your year-round tax planning sessions so you claim the larger, defensible credit.
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