Don’t Leave R&D Tax Breaks on the Table

If you’re a business owner, there’s no doubt you’ve spent time and money creating better processes, materials, or solutions for your customers. Those activities can lead to big tax breaks, but the IRS won’t go out of its way to spell that out for you.

For whatever reason, research and development (R&D) tax breaks are an elusive secret that few business owners understand. Perhaps it’s because many business owners don’t consider themselves scientists or inventors. You’re just doing whatever it takes to make your customers happy and improve your bottom line.

But when it comes down to it, many business owners create (either by choice or by necessity) and, therefore, may be leaving related tax breaks on the table. The main opportunity here is the research tax credit, which can be achieved by fulfilling a four-part qualified research activity test:

  1. The purpose of the activity must be to develop a new or improved product or process in the U.S. That “product” could be a new technique or method.
  2. The activity must involve a hard science like engineering, physics, chemistry, or computer science. Be open-minded here: It’s likely your R&D fits into one of these categories.
  3. Some technical uncertainty is necessary (called the Section 174 test). In other words, the activity needs to be true trial and error, for which you’re unsure what the result will be.
  4. An evaluation of different alternatives must be completed either through systematic trial and error (trying alternatives and documenting results) or through modeling and simulation.

How can a business owner fulfill these requirements? Let’s look at building contractors as an example. You may be faced with building on less-than-optimal land or within unique city or county requirements. Maybe you’ve been challenged to build stronger, lighter, faster, or more environmentally friendly, energy-efficiently, or automation-enabled. Perhaps the architectural design is unique, or maybe you’re building near an Interstate and have a new idea for soundproofing. Or maybe it’s a back-office management method or a new way of ensuring perimeter security during construction.

These challenges often require innovation on your part to overcome. Local organizations like the Southwest Research Institute exist for this purpose: They have resources like scientists and engineers available to help both large corporations and small businesses wanting to invest in research activities. The tax break could cover the cost of contracting with an organization like this to perform research activities.

Industry-specific tax breaks may also be available. Builders, for example, should consider whether their innovative new builds meet the requirements for the New Energy Efficient Home Tax Credit or, for commercial builds, the expanded Energy Efficient Commercial Buildings Deduction.

Finally, innovation can change how the IRS views your business activities and, thus, can improve your tax bill. When we were first introduced to a company in the self-service car wash industry, the owners had been operating and paying taxes as a distributor of car-cleaning solutions. But they made their own chemicals, which made them a manufacturer. Recategorizing saved them a substantial amount in taxes.

The moral of the story: If you’re thinking outside the box with your business, consider whether you should also be thinking outside the usual box on your taxes. Feel free to contact us with questions.

Photo from 123rf.com

Client Spotlight

A terrifying home invasion involving men with masks and guns set Pam Wood on an unexpected path to business ownership in 1981….
What happens when you combine a passion for creating, a knack for business, and deep family values? For Scott Klingler, owner of MergeWorks, it resulted…
Bessie M. Irizarry loves embracing a good challenge. It’s one of the many reasons she’s earned respect as a female engineer and business owner in…
San Antonio native Mark Lopez can’t recall a time he didn’t envision himself following the footsteps of his father, a project manager, into the construction…
Siew Pang knows that the key to unlocking the American dream can be discovered by embracing unexpected opportunities….
If you’re a San Antonian, you may not want to imagine your weekend without brunch at the city’s beloved Magnolia Pancake Haus….
Greg Thompson has long respected money and how it can catalyze greater things….
You may not be aware of it, but Don Lasseter has helped you throw a party. How do we know that? He’s the franchise owner…
Land surveyors aren’t known for exceptional customer service. But why shouldn’t they be? David Breaux set out in 1998 to prove that treating customers right…
When Lance Rose sees a business need, he fills it. That’s how he and Terri, his wife of 30 years, have evolved into the proud…
Matt and Lara Bruhn met while in graduate school at Harvard. He served as an officer and F-15C pilot with the U.S. Air Force….
Growing up in Piedras Negras, Coahuila, Mexico—just south of Texas along the Rio Grande—Oscar E. Flores dreamed of becoming a designer….

Blogs and Articles

Bankler Partners, LC, Expands into a New Name and Space

This is a pivotal moment for our firm. The transformation to Bankler Partners and move to our new, modern space represents our dynamic growth and...

Bankler Partners, LC, Expands into a New Name and Space

Read More

Digital Assets and Your Taxes

You may have reveled in the Wild West days of cryptocurrency and other digital assets, but we’re entering an era of meticulous record keeping and...

Digital Assets and Your Taxes

Read More

The Goldilocks Rule for Tax Withholding

If you’re like half of Americans this year, you are more dependent on your tax refund to pay for necessities than you have been in...

The Goldilocks Rule for Tax Withholding

Read More

How Inherited Assets Affect Your Taxes

Inheriting assets can be a financial blessing, but it also raises essential tax questions that many heirs overlook. How you manage those assets can have...

How Inherited Assets Affect Your Taxes

Read More

Getting Hit by Someone Else’s Bankruptcy

Finding out that another business or individual who owes your business money has declared bankruptcy can feel like a kick to the stomach....

Getting Hit by Someone Else’s Bankruptcy

Read More

Welcome to Texas: Cutting Tax Ties with Your Previous State

San Antonio is currently one of the fastest-growing metro areas in the nation. If you’re among our new residents, welcome! Before you enjoy the tax-friendly...

Welcome to Texas: Cutting Tax Ties with Your Previous State

Read More

Reaching the Unreachable IRS

Reaching the IRS has always been challenging. With the IRS workforce reduction continuing, many believe your odds of reaching a warm body to resolve a...

Reaching the Unreachable IRS

Read More

How Is Costco Gold Taxed?

Gold, silver, and other precious metals have emerged as standout assets in today’s unpredictable economy due to their ability to remain somewhat independent from stock...

How Is Costco Gold Taxed?

Read More

Yes, You Do Still Have to File Taxes

Early filing numbers are measurably down this year, data security concerns are high, and IRS staffing is in disarray. But if you’re considering scrapping it...

Yes, You Do Still Have to File Taxes

Read More

Retirement Plan Perks for Texas Small Businesses

Retirement Plan Perks for Texas Small Businesses

Read More

Top 6 Worst Social Media Tax Tips

Top 6 Worst Social Media Tax Tips

Read More

What’s Happening with the Corporate Transparency Act?

In March 2025, the Financial Crimes Enforcement Network (FinCEN) issued an interim final rule removing the requirement for U.S. companies to report beneficial ownership information...

What’s Happening with the Corporate Transparency Act?

Read More

Love & Marriage & Your Business Assets

Love & Marriage & Your Business Assets

Read More

How Small Business Owners Reduce Taxable Income

How Small Business Owners Reduce Taxable Income

Read More

Spot These Tax Scam Signs Before It’s Too Late

Spot These Tax Scam Signs Before It’s Too Late

Read More

Now Accepting New Clients

Let’s Start the Conversation

Let’s take a look at your finances together. We offer a complimentary 1-hour call to review your past tax returns. If we see a way to help you, we will.