Questions about the research credit, answered plainly

The federal research and development tax credit, found at Section 41 of the Internal Revenue Code, is a general business credit that reduces federal income tax dollar-for-dollar (subject to the IRC §38(c) limitation, with unused credits carried back one year and forward 20 years) for businesses that conduct qualified research in the United States. Most states operate their own parallel program, and a company can often claim both for the same underlying work.

No. Qualification turns on a four-part test, not on job titles or facilities. Software teams, manufacturers, engineering firms, food and beverage producers, agricultural technology businesses and many others qualify because they are resolving technical uncertainty through a documented process of experimentation.

The activity must have a permitted purpose: the costs must be eligible research or experimental expenditures (IRC sections 174 and 174A), and the research must relate to a new or improved business component (a product, process, computer software, technique, formula or invention) and aim to improve its function, performance, reliability or quality. It must be technological in nature, meaning the process of experimentation fundamentally relies on principles of the physical or biological sciences, engineering or computer science. It must seek to eliminate technical uncertainty. And substantially all (at least 80%) of the activities for the business component must be elements of a process of experimentation, such as modelling, simulation or systematic trial and error, used to evaluate one or more alternatives.

An examination of a research credit claim by the IRS or a state revenue agency. The examiner issues Information Document Requests for the evidence behind each part of the claim: the business components and the four-part test, wages and time, supplies and contract research, the calculation and, for a state credit, where the work was performed. A mock R&D tax audit asks questions modeled on those requests first.

Often, yes. Qualified small businesses (gross receipts under $5 million in the current year and no gross receipts before the five-year period ending with that year) may elect to apply up to five hundred thousand dollars of federal credit (up to $250,000 against the employer share of social security tax and up to $250,000 against Medicare tax) each year against payroll taxes. Several states go further and pay cash refunds, and a handful allow unused credits to be sold to other taxpayers.

A refund claim (generally an amended return, or an administrative adjustment request for partnerships under the centralized audit regime) must usually be filed within three years from the date the original return was filed (a return filed early is treated as filed on its due date) or two years from the date the tax was paid, whichever is later (IRC §6511). A federal research credit refund claim must also include three items of information: all business components to which the claim relates, the research activities performed for each, and the total qualified wage, supply and contract research expenses, together with a declaration signed under penalties of perjury. The names of the individuals who performed each activity and the information each sought to discover are no longer required with the claim (starting June 18, 2024), but the IRS may request them in an examination. Through January 10, 2027, taxpayers generally have 45 days to perfect a deficient claim. A company that has never claimed may be able to recover credits for prior open years. Prior-year claims also change other items on those returns (for example the IRC §280C(c) reduction to the research expense deduction, or the reduced-credit election, which must be made on a timely filed original return), so they should be modeled before filing. Statutes differ by state, and some state programs require an application before the spending occurs.

For tax years beginning after December 31, 2024, new IRC §174A lets businesses deduct domestic research and experimental expenditures in the year paid or incurred (or elect to capitalize and amortize them over at least 60 months). Foreign research expenditures must still be amortized over 15 years under §174. Any taxpayer may deduct remaining unamortized 2022–2024 domestic amounts in full in the first tax year beginning after December 31, 2024, or ratably over that year and the next. Eligible small businesses (average annual gross receipts of $31 million or less) could also elect to apply §174A retroactively to tax years beginning after December 31, 2021 on amended returns filed by July 6, 2026 (or earlier, if the refund-claim period for that year ended first); that window has now closed. Under §280C(c), the §174A deduction is reduced by the research credit unless the reduced-credit election is made on a timely filed original return. Model these choices with your advisor.

In the mock audit, AI (Google Gemini) reads the documents you upload, matches them to the examiner-style questions, rates the evidence, drafts first-pass responses and flags inconsistencies. In Swanson Reed's separate services, automation also parses ledgers and payroll data and groups activity into candidate projects. If requested, a person at Swanson Reed can review your mock audit results and re-perform the mock audit for assurance. The taxpayer remains responsible for the positions on its return.

creditARMOR and TaxTrex are products of Swanson Reed, a specialist R&D tax advisory practice. creditarmor.ai is operated by RandD Tax Credit Solutions LLC. Swanson Reed's specialists provide technical review and multi-jurisdiction experience under separate engagements. If needed, Swanson Reed can assist you with representation before the IRS.

The creditARMOR mock audit is free. Scoping is also free, and for separate Swanson Reed services pricing is agreed before work begins, based on the size and complexity of the engagement. We do not price documentation or examination support work as a percentage of an unverified estimate.

Companies that claim, or plan to claim, the federal research credit and a state credit, and the finance, engineering and advisory teams that assemble the file. creditARMOR is a free service. Passing this mock audit does not guarantee that your claim will pass an IRS examination. To get access, book a call or email hello@creditarmor.ai.

Yes. A sample account for a fictional company is available to try. With your own login, you can upload your files, and the mock audit reads the documents you upload to produce the ratings and drafts. To get your own login, book a call or email hello@creditarmor.ai. Uploaded files are handled as described in our Privacy Policy.

Your claim forms (Form 6765, the state form, prior-year forms) and, for each project, the records behind the claim across eleven categories: payroll and wage records, time tracking, project documents, contracts and SOWs, technical specifications, test logs and results, design iterations, meeting notes, supply and material invoices, lab notebooks and prior-year returns. The evidence checklist lists them.

The federal credit for every claim, and a state track for the 38 states with a research credit program in the credit database. Other states get a federal-only audit; specialist branches are shown as unassessed.

The tax year you select at the start. Form 6765 requirements change between years; the mock audit uses the year you choose and does not assess other years.

A readiness score from 0 to 100 measures how fully the evidence supports the claim; higher is better. It is a product methodology. It is not the probability of an audit, not an IRS or state determination, and a high score does not certify eligibility or guarantee that a claim will be allowed.

Not automatically. If requested, a person at Swanson Reed can review your mock audit results and re-perform the mock audit for assurance. Statements the automated checks cannot support are flagged so that you or your advisor can review them. Drafts are generated from the documents you upload and marked Review before sending. You and your advisor review them; nothing is sent to the IRS or a state, and creditARMOR software does not represent you before the IRS. If needed, Swanson Reed can assist you with representation before the IRS.