What Are R&D Tax Credits and Why You Should Know About Them

You're developing new treatment protocols, implementing custom EMR workflows, and training staff on novel procedures. What if we told you these everyday activities could save you thousands in taxes and that you might qualify?

What Are R&D Tax Credits?

The federal Research & Development tax credit (IRC Section 41) isn't just for pharmaceutical companies and biotech labs. Made permanent under the PATH Act of 2015, this credit was designed to reward companies for increasing their investment in research activities conducted in the United States.

Here's what makes it powerful: It's not a deduction (which reduces your taxable income). It's a credit that directly reduces what you owe the IRS dollar-for-dollar. If you qualify for a $20,000 R&D credit, that's $20,000 less in taxes you pay. 

A note on timing: As of July 2025, domestic R&D expenses can be immediately deducted under Section 174A, and a portion of those costs may also be eligible for  the Section 41 R&D Tax Credit. (Although the deduction must be reduced by the credit amount, or you can elect to reduce the credit instead).

For startups and growing practices: Qualified small businesses (less than $5M in gross receipts) can apply up to $500,000 in R&D credits against payroll taxes annually, even if you're not yet profitable from an income tax standpoint.

The 4-Part Test: Does Your Practice Qualify?

To claim the R&D credit under Section 41, your activities must pass a rigorous four-part test. All four criteria must be met:

1. Section 174A Test (Permitted Purpose): Your expenses must qualify for immediate deduction under Section 174A, meaning they're paid or incurred in your trade or business for research and development conducted in the United States in an experimental or laboratory sense. You must be working to develop or improve the functionality, performance, reliability, or quality of a business component (product, process, software, technique, formula, or invention).

2. Technological Information Test: You must be discovering information that is technological in nature, rooted in hard sciences like biology, chemistry, physics, engineering, or computer science. You're applying (or intend to apply) this information to develop a new or improved business component. 

Important: You don't have to succeed for it to qualify; the intent and process is what matters.

3. Process of Experimentation Test: All of your research activities must involve experimentation to resolve technical uncertainty. You're testing alternatives, evaluating different approaches, or using systematic trial-and-error methods. The process must be evaluative and generally capable of testing more than one alternative to achieve your desired result.

4. Business Component Test: These tests must be applied separately to each business component. If your entire product doesn't meet the tests, the IRS applies a "shrinking back" rule, examining the most significant subset of elements until either a qualifying component is found or you reach the most basic element that still fails the test.

What Actually Qualifies for Physicians?

Let's get specific. Here's what does and doesn't count:

Qualifies

Developing Novel Procedures or Protocols	Creating a new surgical technique that requires multiple iterations Developing custom treatment protocols with uncertain outcomes Adapting procedures from research into clinical practice
Healthcare Technology & Software Development	Building custom EHR integrations or patient portals Developing telehealth platforms or appointment systems Creating HIPAA-compliant data sharing tools Designing IoT medical devices or remote monitoring systems Building clinical decision support algorithms
Clinical Research & Trials	Conducting FDA clinical trials in the U.S. Testing new medical devices or improved versions Evaluating drug efficacy or safety improvements
Process & Workflow Innovation	Engineering new patient intake systems with technical components Developing quality control processes that involve technical experimentation Creating custom solutions that require multiple design iterations

Doesn't Qualify 

Research After Commercial Production Begins	Once you've started commercial production of a business component, further research on that component doesn't qualify.
Adaptation of Existing Components	Means adapting an existing business component to a particular customer's need (the "Adaptation Exclusion").  Example: Creating custom dentures using standard dental techniques,even though customized, there's insufficient technical uncertainty.
Duplication/Reverse Engineering	Reproducing an existing business component from physical examination, plans, blueprints, detailed specifications, or publicly available information.
Routine Activities	Standard patient care and common medical procedures Efficiency surveys or routine data collection Ordinary testing for quality control purposes Management function or technique studies
Foreign Research	Research conducted outside the United States doesn't qualify for the Section 41 credit (though foreign R&E expenses can be capitalized and amortized over 15 years under Section 174).
Funded Research	Research supported by grants, contracts, or otherwise funded by another person or governmental entity, unless you bear the economic risk and retain substantial rights to the research.
Style, Taste, and Cosmetic Changes	Research related to style, taste, cosmetic, or seasonal design factors.

What Expenses Count as Qualified Research Expenses (QREs)?

The IRS defines QREs as "the sum of in-house research expenses and contract research expenses." Here's what qualifies:

W-2 Wages (The 80% Rule): Wages paid to employees for qualified services they perform during the tax year. Here's where it gets interesting: If "substantially all" (at least 80%) of an employee's services constitute qualified research, then ALL of their wages for the year qualify as QREs, not just the time spent on R&D.

Critical compliance note: The IRS emphasizes that eligibility must be based on what employees actually do, not their job titles or descriptions. During audits, the IRS examines payroll records, job descriptions, performance evaluations, calendars, and appointment books. Document actual time and activities, job titles alone won't suffice.

Supplies: Tangible property (other than land or depreciable property) used in conducting qualified research. This includes materials consumed or expended during R&D activities but excludes equipment or assets that are capitalized.

Contract Research: 65% of amounts paid to third-party contractors (1099s) for conducting qualified research on your behalf. The contractor must perform the research according to your specifications.

Computer Costs: Rental or lease costs for computers used in conducting qualified research (note: purchased computers are capitalized assets and don't qualify under supplies).

Important Considerations & Compliance Requirements

Documentation Is Critical (And the IRS Is Watching) Section 41 is one of the most audited tax credits. The IRS requires contemporaneous documentation, meaning records created at or near the time activities occurred, not reconstructed later. You need:

• Project descriptions outlining objectives and technical uncertainties

• Technical design documents showing the experimentation process

• Meeting notes and project timelines demonstrating a systematic approach

• Financial records directly linking expenses to specific R&D activities

• Payroll records detailing which employees performed qualified services and for how long

• Employee calendars and activity logs proving what work was actually performed (job titles alone are insufficient)

Don't Leave Money on the Table

The R&D tax credit represents one of the most valuable, yet underutilized, tax incentives for physician practices. The misconception that R&D credits are only for pharmaceutical companies or academic research labs causes thousands of qualifying practices to leave substantial tax savings unclaimed each year.

If your practice is developing technology solutions, creating novel treatment protocols involving technical uncertainty and systematic experimentation, or conducting clinical research, you likely qualify. The question isn't whether innovation happens in your practice, it's whether you're capturing the tax benefits Congress intended to reward.

Why some miss this opportunity:

• They don't recognize qualifying activities as "R&D"

• Their tax preparer focuses on annual filing, not strategic credit identification

• They lack the specialized documentation required for IRS compliance

• They're unaware of recent legislation (like the 2025 OBBBA) that made domestic R&E expensing permanent

  
  

The Doc Wealth Prescription: Don't just focus on filing your taxes once a year, but implement a year-round strategic tax planning that identifies every dollar of savings you're entitled to.

Ready to explore if your practice qualifies? Contact our team, and we'll review your activities and see if there is potential for the R&D Tax Credit. Depending on the dollar amount, we may advise getting a formal R&D Credit Study done by a 3rd party company, which typically comes with a comprehensive report and audit protection. Please let us know if you’d like an introduction to one of our partners in this space.

👉 Schedule your free consultation with Doc Wealth’s Team

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Disclaimer:

The information provided in this article is for general informational purposes only and does not constitute legal, tax, or financial advice. You should not rely on this content as a substitute for professional advice tailored to your individual circumstances. Always consult with a qualified tax advisor, attorney, or financial professional before making decisions that may affect your personal or business finances. The author and publisher disclaim any liability for actions taken based on the information contained herein.