Author:
R&D Tax Advisors
Role:
CPA
Publish Date:
Oct 29, 2025
The Question
“What are the biggest mistakes companies make when claiming the R&D credit?”
The federal R&D tax credit is one of the most valuable incentives available to innovative U.S. businesses — yet it’s also one of the most misunderstood.
Each year, companies lose money or expose themselves to unnecessary audit risk because of preventable errors.
Understanding these mistakes is the first step toward claiming the credit confidently and keeping it if ever questioned.
The Short Answer
Most issues fall into three broad categories:
Misunderstanding what actually qualifies as R&D
Weak or incomplete documentation
Relying too heavily on third-party calculations without understanding what’s being claimed
The credit rewards experimentation and technical advancement — but only when backed by evidence.
The Deep Dive
1. Misclassifying routine work as “R&D.”
Not everything labeled “development” qualifies. Routine debugging, cosmetic UI updates, and general maintenance rarely meet the IRS definition of R&D.
The IRS applies a four-part test:
Permitted purpose — Is the goal to create or improve a product, process, or software function?
Technological in nature — Does it rely on principles of engineering, computer science, or similar fields?
Elimination of uncertainty — Was there a genuine technical question about capability, method, or design?
Process of experimentation — Was there systematic testing, modeling, or iteration to resolve that uncertainty?
If the work doesn’t check all four boxes, it likely doesn’t qualify.
2. Missing eligible activities because they seem “too simple.”
Just as common is the opposite problem: overlooking qualifying work.
Many teams assume R&D means lab coats and patents, so they miss things like:
Internal tool development
Algorithm refinement
Integration testing to improve performance or scalability
Process automation and data-pipeline improvements
The key is whether technical uncertainty existed — not how flashy the project sounds.
3. Poor or missing documentation.
The IRS does not accept “we remember doing it.”
Contemporaneous records are essential. Strong documentation usually includes:
Design or architecture documents
Project tickets or sprint logs
Source-code commits or version-control notes
Meeting summaries outlining problems and iterations
Time-tracking data linking employees to qualified projects
Good records protect the credit years later when memories fade and teams change.
4. Over-reliance on contractor costs.
External developers and consultants can qualify, but only if:
The work is performed within the United States, and
The company retains rights to the research and bears the risk of failure.
If a contractor keeps ownership of the IP or delivers a guaranteed result, those costs generally do not count.
Misclassifying vendor invoices is one of the most frequent adjustments in IRS examinations.
5. Misapplying the percentage of qualifying time.
Many companies estimate how much time employees spent on qualified work months later. Without corroborating evidence — project plans, Jira reports, or engineering notes — these estimates can be challenged.
A more reliable approach is to map activities to projects contemporaneously, using both engineering input and documentation trails to support the percentages claimed.
6. State credits overlooked or double-counted.
R&D credits exist at both the federal and state levels, but rules vary.
Some states mirror the federal definition of qualified research; others use unique formulas, expense caps, or alternative credit rates.
It’s common to see credits missed entirely or, worse, counted twice.
For example, Texas recently announced major updates effective January 1, 2026 — including refundable options for small and veteran-owned businesses and changes to carryforward periods.
Keeping track of state-specific rules ensures the total benefit is accurate and defensible.
7. Choosing the wrong provider — or not understanding their methodology.
The market for R&D credit services is diverse. Some providers rely on automated models that estimate credits with minimal review; others perform deep technical interviews and create audit-ready documentation.
A fast calculation may look attractive until an auditor asks, “How did you determine this work qualified?”
Before engaging any provider, ask:
How do you document qualifying activities?
What’s included in the fee — calculation, documentation, audit support?
Who performs the technical interviews?
Will you stand behind the claim if the IRS or a state requests clarification?
Knowing these answers upfront prevents surprises later.
The Takeaway
The R&D tax credit rewards innovation — but it demands rigor.
The companies that benefit most are those that treat the credit as a recurring, well-documented part of their tax strategy, not a once-a-year checkbox.
Avoiding these seven mistakes means stronger claims, fewer surprises, and greater peace of mind when it matters most.
