If your company is pre-profit, you might not think that tax credits matter much. With no bill due to the IRS, it probably just feels like extra paperwork. But if you’re paying employees, there’s one tax savings opportunity you should absolutely note: the R&D tax credit.
This credit lets qualifying small businesses save up to $500,000 on their payroll taxes. That means you can reduce the amount your company’s paying toward your employees’ Social Security and Medicare taxes. And you can do so by up to a half-million dollars annually for up to five years.
Plus, this credit gives you options. If your company is turning a profit, you can alternatively apply it to your income taxes.
No matter the scale of your business, the R&D tax credit offers some serious advantages. Better still, if you hit the threshold for how much you can claim in any given year, you can carry it forward up to 20 years.
With significant and long-term tax savings on the table, you’re probably wondering how to maximize this credit. Hiring for some specific job titles can help here.
The connection between the R&D tax credit, qualified research expenses, and job titles
This credit comes from Section 41 of the Internal Revenue Code (IRC). It lets you take a percentage of everything your company spends on what the IRS calls qualified research expenses (QREs).
Under §41(b)(2)(A)(i), “any wages paid or incurred to an employee for qualified services performed by such employee” counts as a QRE. That’s where the job title piece comes in.
It’s pretty easy to connect certain job titles — say, alpha tester or design engineer — to R&D activities. In some cases, you might be able to count 100% of the employee’s wages toward your credit, assuming they’re spending 100% of their time on qualifying research activity.
The key here is recordkeeping. You need a way to directly link that person’s time, the wages you paid them for that time, and a qualifying research activity.
That means having them work on an activity that passes a four (external use software) or seven-part test (internal use software), depending on the business component you’re researching/developing.
Job activity that qualifies for the R&D tax credit
Generally speaking, QREs need to pass a four-part test. But if you’re developing software that will primarily be used internally, the IRS adds a few more parameters.
The four-part test
The time employees spend working on R&D activity generally counts toward the credit if they’re using that time to:
- Discover new information
- Undertake research that’s technological in nature (meaning they’re using hard science)
- Develop a new or improved business component (not quality-control or iterate on an existing one)
- Use a process of experimentation
The main takeaway here is that the R&D process these employees work on needs to be science-backed and clearly documented, all aimed at developing something new for your business.
The seven-part test for internal use software
When you’re developing software for internal use, the IRS tacks on three additional pieces to satisfy its “high threshold of innovation.” In this case, you still need to meet all the elements of the four-part test. Then, on top of that, you need to be able to prove that the software is:
- Innovative, meaning it delivers notable advantages to your business if it works
- Economically risky, meaning you’ll lose something if it doesn’t work
- Not commercially available
If you can prove all of those things, the time your team spends on developing internal software can qualify for the R&D tax credit.
Strategic job titles to help you claim the credit
Without further ado, some job titles that often have work activity eligible to be counted as a QRE include:
- AI research scientists
- AI infrastructure architects
- Alpha or beta testers
- Computer programmers
- Data scientists
- Designers
- Engineers, including:
- Application engineers
- Automation engineers
- Civil engineers
- Computer engineers
- Design engineers
- Electrical engineers
- Large language model engineers
- Machine learning engineers
- Mechanical engineers
- Natural language processing engineer
- Project engineer
- Software engineers
- Structural engineers
- Production managers
- Process technicians
- Quality assurance personnel (if they’re performing QA for a new or improved business component you’re developing, not an existing one)
- Software developers
- Technicians
Supervising R&D activities also qualifies. The portion of your chief technology officer’s time spent there could be a salary you can apply toward the credit, for example. On the other hand, folks on your team supporting the R&D department but not necessarily performing core R&D tasks themselves can also qualify – job titles here could include: QA engineer, DevOps engineer, lab technician, etc.
Connecting job titles to QREs
Unless someone’s doing qualifying R&D 100% of the time, you can’t apply their entire salary. Instead, you need to have a log of the hours spent and the research activity undertaken during that time.
Say you have a designer who spends 20 hours a week working on iterative design using hard science methods, but their other 20 hours go toward supporting marketing assets. Half of their wages can apply toward your credit. To substantiate that, you need thorough records of the time they spent and what they worked on.
Your accountant can help you identify qualifying job titles and research activities. Then, they can build the required recordkeeping to substantiate your R&D tax credit.
A final thought: More direct R&D tax savings with the One Big Beautiful Bill Act
Everything we’re talking about here comes from IRC § 41. But there’s another related part of the IRC that can help your company save even more.
IRC § 174 lets businesses deduct R&D expenses.
Before the One Big Beautiful Bill Act (technically called “the Act”), you needed to amortize qualifying domestic R&D expenditures over five years. The Act undoes that, meaning you can claim that deduction immediately.
Better still, you can amend previous years’ returns to take the full deduction for qualifying expenses you were amortizing.
Talk with your accountant about how your company can tap this option to further turn your R&D expenses into tax savings.
Maximize the tax benefits of your R&D
The right job titles can make it easier to keep the records the IRS wants to see here. There’s still quite a bit of work involved, though, to show the process of experimentation, not to mention to calculate the resulting credit you can take.
We can help with all of this. Here at ShayCPA, we specialize in this tax savings opportunity. We offer a fixed-fee R&D credit evaluation to help your company figure out precisely how much you could save here. To get started, contact us.
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