R&D Tax Credits in the USA: What UK Companies Should Know

06 Jul 2026

R&D tax credits in the USA can reduce federal tax liabilities for companies carrying out qualified research. For UK companies with US subsidiaries, engineering teams, product development activity or software operations, the incentive can form part of a wider local-country R&D tax strategy rather than sitting outside the group funding plan.

R&D Tax Credits in the USA: What UK Companies Should Know

What are R&D tax credits in the USA?

R&D tax credits in the USA are federal tax incentives for businesses that incur qualified research expenses in activities designed to create or improve products, processes, software, techniques, formulas or inventions. The credit is claimed using Form 6765 and is generally calculated using either the regular research credit method or the Alternative Simplified Credit, commonly shortened to ASC.

The credit is incremental. This means it does not simply reward all research expenditure at a flat rate. Instead, it compares current qualified research expenses against a base amount or historical average. This structure makes evidence, cost classification and year-on-year tracking central to a defensible claim.

Why the USA matters in an international R&D tax strategy

The USA is often central to international R&D portfolios. UK-headquartered groups may have US activity through software development teams, advanced manufacturing sites, biotech research operations, clean technology pilots or customer-led product adaptation. Where the work is performed in the USA and the US entity bears the relevant cost and risk, the federal R&D tax credit should be reviewed alongside state-level incentives.

This matters more now that UK R&D tax relief has tighter rules for some overseas expenditure. A US R&D project may no longer be viewed only through the lens of a UK claim. Finance teams need to ask where the work is done, which entity has the economic benefit, who owns or controls the project outputs, and which country provides the most appropriate incentive route.

USA R&D tax credit benefit amounts

Credit route	Indicative benefit amount	Who it may help	Key points to review
Regular research credit	20% of qualified research expenses above the statutory base amount.	Companies with established US operations and a reliable historical expenditure base.	Requires base amount calculation using historical gross receipts and fixed-base percentage rules.
Alternative Simplified Credit (ASC)	14% of current-year qualified research expenses above 50% of the average qualified research expenses for the prior three tax years. If there were no qualified research expenses in those years, the ASC is 6% of current-year qualified research expenses.	Companies that prefer a simpler calculation or cannot use the regular method efficiently.	Common route for many claimants because it relies on a shorter lookback period.
Qualified small business payroll tax credit	Up to $500,000 per year may be elected against payroll tax for qualifying small businesses.	Start-ups and early-stage companies with limited income tax liability but US payroll taxes.	Election is made on Form 6765 and applied through employment tax filings using Form 8974.
State R&D tax credits	Varies by state. Some states provide separate credits that may be used alongside the federal credit.	Businesses with R&D teams, laboratories, facilities or payroll in states with local R&D incentives.	State rules differ on rates, carry-forward, refundability, eligible costs and filing process.

How the federal R&D tax credit works

The US federal credit focuses on qualified research expenses, usually referred to as QREs. These can include wages for employees performing, supervising or supporting qualified research, supplies used in the research process, certain contract research expenses, and some cloud or rental costs depending on the facts and the applicable rules.

The company must show that its activities satisfy the IRS four-part test. In practical terms, the activity should be technological in nature, seek to develop or improve a business component, involve uncertainty, and include a process of experimentation. The test is not limited to laboratories. Software, engineering, manufacturing processes, materials development and product performance work may qualify where the underlying activity meets the statutory criteria.

Eligibility: the four-part test

For a US R&D tax credit claim to be credible, finance teams should be able to explain the activity against four points:

Technological in nature: the work relies on engineering, computer science, physical science, biological science or another recognised technical discipline.
Qualified purpose: the work aims to create or improve function, performance, reliability or quality.
Elimination of uncertainty: the team is trying to resolve uncertainty around capability, method or design.
Process of experimentation: the team evaluates alternatives, tests hypotheses or iterates towards a technical outcome.

What costs can be included?

The strongest claims usually start with a clear cost map. US claims commonly review wages, supplies and contract research. The challenge is not simply identifying expenditure, but connecting it to qualified activities and allocating it at project or business component level.

Cost category	Potentially eligible where…	Evidence to retain
Wages	Employees perform, supervise or directly support qualified research.	Role descriptions, time records, project allocations, technical meeting notes and payroll reports.
Supplies	Materials are used or consumed during qualified research.	General ledger detail, invoices, build records and allocation methodology.
Contract research	A third party performs qualified research on behalf of the claimant, subject to risk and rights analysis.	Contracts, statements of work, technical outputs, acceptance criteria and payment records.
Software and computing costs	Costs support qualified software or technical development activity and meet applicable rules.	System logs, development records, sprint notes, architecture decisions and project documentation.

Section 174A and why tax treatment still matters

The credit is only one part of the US R&D tax picture. Following tax law changes, domestic research or experimental expenditures paid or incurred in tax years beginning after 2024 may generally be deducted under new Section 174A, while taxpayers may also have transition options for previously capitalised amounts. This is separate from the Section 41 research credit calculation, but it affects the wider financial case for US R&D activity.

For CFOs, the practical point is that the US position should be reviewed as a package: credit calculation, expense deduction or amortisation treatment, payroll tax offset, state credits and documentation. These items sit in different parts of the tax return, but they are all affected by how the business defines, records and governs R&D activity.

Common issues for UK companies with US R&D teams

Assuming UK and US R&D definitions are interchangeable.
Relying on finance ledgers without project-level technical evidence.
Failing to separate US-performed R&D from group-wide product development activity.
Overlooking contract terms that affect risk, rights and eligible contract research costs.
Missing the payroll tax credit route for qualifying early-stage US businesses.
Treating the federal credit as the only incentive, without reviewing state-level rules.

How FI Group by EPSA supports international R&D tax credit reviews

FI Group by EPSA supports companies with international R&D tax incentives by combining local scheme knowledge with a consistent evidence and governance approach across jurisdictions. For UK groups with US operations, this can help finance teams align project eligibility, cost mapping, entity-level benefit analysis and documentation standards across the UK, USA and other relevant countries.

Practical checklist before claiming R&D tax credits in the USA

Identify which US entity incurred the cost and controlled the relevant R&D activity.
Map activities to the four-part IRS test before finalising the cost calculation.
Separate wages, supplies, contract research and software-related costs.
Check whether ASC, regular credit or payroll tax offset is the best calculation route.
Review state-level incentives where the activity or payroll is located.
Prepare project-level evidence before filing Form 6765.
Check whether Section 174A treatment affects the wider tax position.

FAQs: R&D tax credits in the USA

What are R&D tax credits in the USA?

They are federal tax credits for businesses that incur qualified research expenses in activities that meet the statutory research credit rules. They are usually claimed on Form 6765.

How much is the US R&D tax credit worth?

The regular credit can equal 20% of qualified research expenses above a base amount. The ASC is generally 14% of current-year qualified research expenses above 50% of the prior three-year average, or 6% where there are no qualified research expenses in the prior three years.

Can start-ups use the US R&D tax credit?

Qualifying small businesses may be able to elect to use up to $500,000 of research credit against payroll tax, subject to the relevant conditions and filing process.

Can UK companies claim R&D tax credits in the USA?

A UK parent does not claim the US credit simply because it owns a US subsidiary. The relevant US taxpayer must incur qualifying costs and meet the US rules. Group structure, contracts and economic benefit should be reviewed.

Do US R&D tax credits apply to software development?

Software development can qualify where it meets the statutory test, including technical uncertainty and a process of experimentation. Routine configuration or purely cosmetic changes are unlikely to be sufficient on their own.