The R&D tax credit is one of the most powerful tools small businesses can use to lower their tax liability, yet many companies are leaving money on the table.
That’s because qualifying for the credit isn’t limited to hiring engineers or conducting lab experiments. In reality, many common business activities tied to innovation or improvement may qualify, and most CPAs don’t catch them.
In this article, we’ll walk through five commonly overlooked expenses that could help your business unlock significant tax savings under the R&D tax credit.
1. Employee Time Spent on Problem Solving
If your team spends time refining workflows, troubleshooting new systems, or testing improvements to products or services, that time could be considered a qualified research activity.
Examples include:
– A software team testing new integrations and identifying bugs.
– A manufacturer optimizing their assembly line for better throughput.
Why this is missed: Most companies don’t track time at a granular enough level to capture technical problem-solving as a distinct category.
What to do: Begin categorizing time related to development, experimentation, and iteration. Time logs, even if informal, can help support your claim.
2. Prototyping Supplies and Materials
Materials used to build or test prototypes may qualify, especially if they are not included in the final saleable product.
This can include:
– 3D printing supplies
– Physical model parts
– Non-reusable components
– Failed iterations
Why this is missed: These expenses are often grouped into general supplies or operations, rather than linked to an R&D initiative.
What to do: Track purchases used specifically for experimentation or design refinement, and separate them from bulk or production-level purchases.
3. Cloud Computing and Software Testing Tools
Cloud environments used during development may qualify if they are directly tied to testing, validation, or experimentation.
Common examples include:
– Amazon Web Services (AWS) or Google Cloud used for development environments
– Software tools used to simulate real-world usage
– Sandbox environments for testing algorithms or features
Why this is missed: Cloud services often appear as generic overhead rather than part of an R&D process.
What to do: Document usage of cloud services by project, especially if they relate to building or testing technical features.
4. Contractor or Freelancer Support
If you’ve hired a contractor or freelance expert to help improve a process, develop a tool, or design a new product feature, their contributions may qualify.
Why this is missed: Many businesses assume that only W-2 employee labor is eligible for the credit.
What to do: Save contracts, invoices, and email communication that outlines the contractor’s role and scope of work. These can support your claim when linked to eligible R&D activities.
5. Internal Software Development for Process Improvement
Not all qualifying software needs to be customer-facing. Internal tools built to improve efficiency, reduce waste, or solve technical challenges can also qualify.
Examples include:
– Building a custom CRM to fit your sales process
– Developing a reporting tool that consolidates data across platforms
– Creating scheduling logic to automate dispatch or inventory
Why this is missed: Internal-use software claims are subject to higher scrutiny, and many tax professionals avoid them altogether.
What to do: Document the technical goals of the project, the challenges involved, and the steps taken to solve them. Keep track of time spent and project iterations.
Qualifying for the R&D tax credit goes far beyond traditional lab-based research. If your team is building, testing, improving, or problem-solving with a technical goal in mind, there’s a good chance some of your costs can be recovered through the credit.
At NestWorth, we specialize in helping small businesses uncover these hidden opportunities. With the right documentation and guidance, your business could reinvest thousands in future growth.
Get a Free Assessment
Not sure what qualifies? Contact our team at NestWorth for a free review of your eligibility. We’ll help you identify overlooked expenses and guide you through a complete, audit-ready R&D claim.
