Many service business owners assume the R&D tax credit is only for tech companies, biotech firms, or manufacturers.

That assumption could be costing you tens or even hundreds of thousands of dollars in missed tax savings.

The reality? The federal R&D credit, and many state versions, are far broader than their name suggests. If your company solves unique client problems, develops custom systems, or improves processes, you could qualify. And in 2025, the potential benefit is bigger than ever.

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What The R&D Tax Credit Actually Covers

The IRS designed the R&D credit to reward innovation, but its definition of “research” is much broader than most owners think. You don’t need a lab — you need problem-solving backed by a process.

To qualify, your work generally needs to meet these four criteria:

1. Permitted purpose – Creating or improving a product, process, technique, formula, or software to enhance performance, reliability, quality, or functionality.
   
   
2. Elimination of uncertainty – At the outset, the method or design wasn’t certain.
   
   
3. Process of experimentation – You tested alternatives, prototypes, or iterations.
   
   
4. Technological in nature – Based on engineering, computer science, or other technical principles.
   
   

Examples of Qualifying R&D in Service Businesses

Here’s where many business owners have their “lightbulb moment.” Common qualifying activities include:

• Architecture & engineering – Designing unique structural solutions, testing materials.
  
  
• Marketing agencies – Building proprietary analytics tools, experimenting with AI-driven ad algorithms.
  
  
• Financial services – Creating software for compliance automation or portfolio risk modeling.
  
  
• Construction – Testing energy-efficient building methods.
  
  
• Healthcare – Designing custom patient management systems.
  
  
• IT & consulting – Building cybersecurity frameworks or custom integrations.
  
  

If you’ve ever tested multiple ways to achieve a better outcome for a client, you might already be doing qualifying work.

What Expenses Can Be Claimed

You can generally include:

• Employee wages directly related to qualifying activities (including supervision/support)
  
  
• Supplies used during development
  
  
• Contract research (up to 65% of costs)
  
  
• Cloud computing expenses for testing or development environments
  
  

For many service businesses, this can translate into five- or six-figure credits, directly reducing tax liability. Startups may even apply it against payroll taxes.

Documentation is the Key

A valid R&D claim without documentation is like a tax return without a signature - incomplete. The IRS expects:

• Project plans and proposals
  
  
• Emails or notes discussing technical challenges
  
  
• Test results or iteration records
  
  
• Payroll tied to specific projects
  
  
• Vendor and contractor invoices
  
  

A strong system for tracking this from the start makes filing seamless and defensible in case of audit.

The Opportunity in 2025

With current tax rates, inflation pressures, and new competitive realities, improving after-tax profit matters more than ever.

The R&D credit rewards you for work you’re likely already doing; problem-solving and innovation.

Bold takeaway: If you haven’t reviewed your service business for R&D eligibility in the past two years, you’re probably leaving money on the table.

Action steps

1. Review recent and ongoing projects for qualifying activities.
   
   
2. Build documentation habits now, not at tax time.
   
   
3. Amend past returns if you missed claims. You may go back up to three years.
   
   

Work with a CPA experienced in service industry R&D credits - many generic tax preparers overlook them.