A question that comes up often — and recently came up again during a conversation with a COO and a patent attorney — sounds simple on the surface:

“If two companies spend the same amount on R&D this year, shouldn’t they get roughly the same credit?”

It feels like the answer should be yes.

In reality, the answer is often no — sometimes very no.

And the reason has almost nothing to do with how innovative the companies are in the current year.

It has everything to do with something most people don’t understand until it’s too late:
the base period.

The Intuition Trap

Most people think of the R&D credit as a percentage of what you spend in a given year.

Something like:

“We spent $2 million on R&D, so the credit should be X% of that.”

That intuition is understandable — and wrong.

The R&D credit doesn’t reward spending.
It rewards increases in qualified research spending relative to your past.

In other words, there’s a hurdle you have to clear before a meaningful credit shows up.

The “Hurdle” Most Companies Don’t See Coming

At its core, the federal R&D credit compares:

• your current-year qualified research expenses (QREs)
  to

• a historical baseline derived from prior years.

That baseline is commonly referred to as the base period.

Only the portion of your current-year R&D that exceeds that base meaningfully contributes to the credit.

This is why two companies with identical R&D spend in the same year can end up with dramatically different outcomes.

A Simple Example: Same Spend, Different Credit

Let’s look at two hypothetical software companies.

Company A

• R&D spend in 2025: $2,000,000

• Has been investing heavily in R&D for years

• Historical base is relatively high

Company B

• R&D spend in 2025: $2,000,000

• Only began meaningful R&D investment recently

• Historical base is much lower

On paper, these companies look identical this year.

But for credit purposes, they’re starting from very different places.

What the Base Does to the Math

• Company A clears its base by only a small margin

• Company B clears its base by a wide margin

Even though the current-year spend is the same, the increment above the base is very different.

Result:

• Company A gets a modest credit

• Company B gets a significantly larger one

Nothing about Company B’s engineers being “better” or more innovative caused that result.
It’s purely structural.

Why This Surprises Smart Operators

This concept trips people up because:

• the base period is invisible until you model it,

• early conversations often focus on eligibility, not history,

• and many providers gloss over it when giving estimates.

From a COO or CFO perspective, it can feel arbitrary:

“We did the same work. Why is the result so different?”

Once you understand the hurdle, the outcome makes sense — but it’s rarely explained upfront.

Why the Base Period Is So Important Strategically

The base period doesn’t just affect this year.

It influences:

• how credits scale over time,

• whether future increases are rewarded,

• and how repeatable the credit becomes year after year.

This is why early methodological decisions matter so much:

• how you define qualified activities,

• how consistently you claim,

• how well your documentation aligns with reality.

Those choices shape the baseline you’re carrying forward.

Why Estimating Credits Is Harder Than People Expect

This is also why giving a precise R&D credit estimate before looking at history is risky.

You can’t responsibly answer:

“What will our credit be?”

without understanding:

• prior-year R&D patterns,

• consistency of methodology,

• and how much of the current year actually clears the hurdle.

That’s not hedging — it’s math.

What This Means for Companies Planning Ahead

The key takeaway isn’t:

“The R&D credit is unpredictable.”

It’s:

“The R&D credit is path-dependent.”

Your history matters.
Your consistency matters.
Your baseline matters.

Companies that understand this early:

• set better expectations internally,

• avoid disappointment later,

• and make smarter decisions about how and when to invest in R&D.

The Takeaway

Two companies can spend the exact same amount on R&D in the same year and walk away with very different credits — not because one did “better” R&D, but because the credit rewards change over time, not raw spend.

Once you see the base period for what it is — a hurdle — the system makes a lot more sense.

And once you understand that hurdle, you start asking better questions before committing to a study.