Eligibility: United States

The United States gives a federal income tax credit for increasing research activities under section 41 of the Internal Revenue Code. It is claimed on Form 6765 with the tax return and administered by the Internal Revenue Service. Eligibility has two halves: the taxpayer must be a person who pays or incurs qualified research expenses, and the work those expenses fund must be qualified research. This page covers both halves and the exclusions that sit between them.

Who can claim

Corporations, partnerships, S corporations, individuals, estates and trusts that pay or incur qualified research expenses can claim. Partnerships and S corporations pass the credit through to their partners and shareholders, who claim their share on their own returns. There is no registration, no application and no pre-approval: eligibility is self-assessed and tested only if the return is examined.

Three practical points follow from that. First, the claimant is the entity that bears the expense. A parent company that pays the wages of a research team claims for those wages; a subsidiary that reimburses it does not claim the same wages twice. Where entities are under common control, the law treats the group as a single taxpayer for the credit and then allocates the result between the members. Second, tax-exempt organisations do not benefit from an income tax credit, although a taxable subsidiary can. Third, start-ups with no income tax to reduce are still eligible: a qualified small business can elect to apply up to US$500,000 a year against payroll tax, using Form 8974, which the payroll tax offset page explains.

What counts as R&D

Research qualifies only if it passes all four parts of the test in section 41(d). The costs must be eligible to be treated as research or experimental expenditure under section 174. The work must be undertaken to discover information that is technological in nature. That information must be intended to be useful in developing a new or improved business component. And substantially all of the activities must be elements of a process of experimentation.

The unit of analysis is the business component, meaning a product, process, technique, formula, invention or piece of software, not the company as a whole. The test is conjunctive: failing any single part means the activity does not qualify, however impressive it is otherwise.

Two of the four parts carry a threshold that is worth stating. "Substantially all" for the process of experimentation means 80% or more of the research activities, measured on a cost or other consistently applied reasonable basis. And the regulations allow the test to be applied first to the whole business component and then, if it fails, to successively smaller subsets of it, the "shrinking back" rule, so a project that fails as a whole may still qualify for its most uncertain part.

The published guide on this site walks through each part with the questions we teach claimants to ask of their own work. The short version: permitted purpose does not require novelty to the world, improving your own product counts; technological in nature asks whether resolving your problem depends on hard science, not whether you used technology; uncertainty is judged at the outset, before the work starts; and experimentation is the part examiners probe hardest, because it leaves the clearest evidence trail when it genuinely happened.

Activities that do not qualify

Research after commercial production begins, adapting or duplicating an existing business component, surveys and routine data collection, and research conducted outside the United States are among the exclusions. The statute lists further exclusions that matter in practice: research in the social sciences, arts or humanities; research funded by another person, a grant or a contract, which the funded research page covers; and research related to style, taste, cosmetic or seasonal design factors. Software developed primarily for the taxpayer's own internal use is excluded unless it meets the additional tests in the regulations, which the internal use software page explains.

Where the work is done

The credit rewards research conducted in the United States. The exclusion for foreign research is applied to the place where the activity is performed, not to the residence of the company or the location of its customers. A US company with an engineering team abroad cannot claim that team's wages; a foreign-owned US subsidiary with engineers in Texas can claim theirs. Contract research follows the same rule: 65% of amounts paid for qualified research performed for you counts only where that research is itself performed in the United States.

Remote and hybrid teams need a method. Wages are allocated by where the employee performs the research, so a team split between a US office and a foreign office needs time records that show the location as well as the project. The documentation page sets out what to keep.

Illustrative example

Northfield Pumps, a hypothetical Ohio manufacturer, runs three projects in a year. Project A redesigns an impeller to reduce cavitation; the team was uncertain whether a new vane geometry could hold efficiency at low flow and tested six prototypes. Project B configures its ERP system to a new chart of accounts using the vendor's documentation. Project C has a Mexican sister company develop a control board under a cost-sharing arrangement.

Related pages

• The four-part test in detail
• Eligible expenditure: which costs become qualified research expenses
• The funded research exclusion
• Guide: qualifying versus non-qualifying activities
• Program: R&D Tax Fundamentals