The Question

“How much credit can we actually get?”

It’s usually the first thing founders, CFOs, and engineering leaders ask — and a fair one.
The R&D tax credit can deliver meaningful savings, but the actual number varies widely depending on your payroll, expenses, and how much of that work qualifies.

The short answer: most companies recover somewhere between 5% and 10% of their qualified R&D costs, but that number can swing higher or lower depending on several factors.

The Short Answer

The R&D credit isn’t a fixed amount — it’s a calculated percentage of qualified expenses.
Generally speaking:

• Software and tech startups often see credits equal to 6%–10% of qualifying wages.

• Mid-sized manufacturers or engineering firms may fall closer to 4%–8%.

• Early-stage startups using the payroll tax offset can receive up to $500,000 per year in refundable credits.

So if your company spends $1 million a year on qualifying R&D wages, the credit may range from $50,000 to $100,000.

The key is understanding what counts as qualified research — and how the IRS defines “qualified expenses.”

The Deep Dive

1. How the R&D Credit Is Calculated

The credit is based on three main categories of qualified expenses:

1. Wages paid to employees performing, supervising, or supporting R&D work.

2. Contractor costs for U.S.-based third parties performing qualifying research under your direction.

3. Supplies used in development or testing (mainly for physical product R&D).

The total of these expenses forms your Qualified Research Expenses (QREs).
The credit rate is then applied to those QREs — but the method depends on which calculation you use.

2. The Two Main Calculation Methods

There are two ways to compute the federal R&D tax credit:

a. Regular Credit (Traditional Method)

• Based on historical R&D spending compared to gross receipts.

• Can be quite cumbersome for some companies to calculate due to the complexity.

b. Alternative Simplified Credit (ASC)

• Most common method.

• Equals 14% of qualified expenses that exceed 50% of your average QREs from the prior three years.

• If you have no prior-year R&D history (e.g., a startup), you can use 6% of current-year QREs as a baseline.

That’s why a practical range of 5–10% of qualified spend often holds true across industries.

3. Federal vs. State Credits

The federal credit is only part of the picture.
Many states also offer R&D incentives — some conforming to federal law, others with unique formulas or refundable options.

For example:

• California: 15% credit on qualified expenses above a base amount.

• Texas: 8.722% standard credit (increasing to 10.903% for university-sponsored research beginning 2026).

• Arizona: 20% on incremental R&D, with partially refundable options for small businesses.

Combining federal and state credits can often push the total benefit closer to 10–15% of R&D spend.

4. What Determines How Much You Can Claim

Four main drivers shape the size of your credit:

1. R&D Intensity:
   The more of your team’s time spent on new or improved products, processes, or software, the larger the qualifying base.

2. Documentation Quality:
   Strong contemporaneous records can expand eligible percentages and reduce audit risk.
   Weak records can lead to conservative estimates and lower credits.

3. Company Structure:
   S-corps, C-corps, and pass-throughs allocate credits differently across shareholders or owners.

4. State Filing Strategy:
   Coordinating multi-state claims can compound savings, but requires consistency and careful tracking.

5. What “Getting It Back” Actually Means

For profitable companies, the R&D credit directly reduces federal and state income tax liability — often dollar-for-dollar.
If you owe $200,000 in federal income tax and have a $75,000 R&D credit, you’ll owe $125,000 instead.

For pre-revenue startups, the credit can offset payroll taxes instead.
That’s real cash savings, typically spread over subsequent payroll periods.

6. Estimating Your Own Credit

While no online calculator can perfectly model your credit, a quick rule of thumb helps:

These numbers assume primarily U.S.-based engineering teams with moderate documentation.
Exact figures depend on activity mix, states of operation, and prior-year base amounts.

The Takeaway

The R&D credit isn’t a flat rebate — it’s a function of how much you invest in innovation and how well you can document it.
Most companies can expect a 5–10% return on their qualified R&D spend, with additional upside from state programs.

For growing startups, that can mean hundreds of thousands in savings — money that goes straight back into hiring, building, and extending runway.

The key isn’t just knowing you qualify.
It’s understanding how much — and setting up the right systems so that answer becomes clearer (and larger) every year.