R&D stands for Research and Development. In the tax industry, R&D refers to activities aimed at developing new products, improving existing ones, or creating more efficient processes and technologies.

At its core, R&D is how companies reduce technical uncertainty and turn ideas into measurable outcomes.

What Is Included in R&D?

R&D covers a broad range of activities, which is why it is often misunderstood. Common R&D activities include:

• Product and Technology Innovation
  Designing new products, features, or systems.

• Technical Problem-Solving
  Resolving engineering, software, or process challenges where the outcome is uncertain.

• Market and Technical Research
  Evaluating customer needs, industry trends, and technical feasibility.

• Process Improvement
  Developing more efficient manufacturing, production, or operational workflows.

• Intellectual Property Development
  Creating and protecting patents, trade secrets, and proprietary methods.

Because these activities overlap across departments, R&D may be called engineering, product development, innovation, or process improvement inside an organization.

The R&D Process (High-Level)

While no two companies follow the same approach, most R&D efforts include:

1. Project Definition
   Identifying objectives, scope, risks, and constraints.

2. Research and Data Collection
   Reviewing existing knowledge and gathering technical or market data.

3. Experimentation and Prototyping
   Testing hypotheses through prototypes, models, or simulations.

4. Analysis and Evaluation
   Assessing results to determine feasibility and next steps.

5. Documentation and Reporting
   Recording methods, findings, and conclusions.

6. Implementation
   Applying successful R&D outcomes to products or processes.

Throughout the process, companies must carefully document activities and protect intellectual property.

Why R&D Matters for Businesses

R&D enables companies to:

• Stay competitive in changing markets

• Improve efficiency and reduce costs

• Develop defensible intellectual property

• Solve complex technical challenges

However, R&D is inherently risky. Not all projects succeed, and outcomes are often uncertain.

R&D and Tax Incentives

Because R&D benefits the broader economy, governments offer incentives to encourage investment in research activities.

In the United States, companies may qualify for the federal R&D tax credit, which can offset income tax or payroll tax liability for eligible research expenses.

Learn more about R&D Credits

R&D does not stop at innovation. Many research activities may also qualify for federal tax incentives.

Explore these related resources to go deeper:

• What is the R&D Tax Credit? A plain-English overview of how the federal R&D tax credit works and who can claim it.

• Qualified Research Expenses (QREs) A breakdown of the wages, supplies, and costs that may qualify for the R&D credit.

• Form 6765 Explained A step-by-step guide to the IRS form used to calculate and claim the R&D tax credit.

Get in touch if you'd like to discuss the R&D Tax Credit with an SPRX tax expert.