Discover why recent federal and state developments are strengthening R&D tax credits—and how CFOs can strategically tap into enhanced innovation incentives in 2025.
For too long, the R&D tax credit has been viewed as the exclusive domain of tech firms and research labs. In reality, it’s one of the most versatile, valuable, and increasingly mainstream financial tools available to businesses today. And recent legislative momentum—at both the federal and state levels—has made it even more attractive.
For CFOs, this is more than a tax break. It’s a cash flow strategy. It’s innovation capital. And in 2025, it’s a missed opportunity if left untapped.
What Is the R&D Tax Credit?
The Research and Development (R&D) tax credit is a federal incentive (with many state-level counterparts) designed to reward companies that innovate. Available since 1981 and made permanent in 2015, it provides a dollar-for-dollar reduction in tax liability for qualifying activities—like improving processes, developing software, or creating new products.
In recent years, the definition of qualifying R&D has broadened, making it applicable to manufacturers, software developers, engineering firms, food producers, and even construction companies.
What Activities Qualify?
The IRS uses a four-part test:
- Permitted Purpose – The activity improves a product, process, software, or technique.
- Elimination of Uncertainty – Technical uncertainty is being addressed.
- Process of Experimentation – The activity involves systematic evaluation of alternatives.
- Technological in Nature – The work relies on principles from science or engineering.
R&D doesn’t have to be groundbreaking—incremental improvements often qualify.
Why CFOs Should Pay Attention
The financial upside is significant:
- Federal credits equal 6%–10% of qualified expenses
- Many states offer additional 3%–15% credits
- Startups can claim up to $500,000 per year against payroll taxes
- Past returns can be amended to capture three years of missed credits
State Momentum: States Are Doubling Down on R&D Too
In June 2025, Texas took a bold step by making its R&D franchise tax credit permanent and increasing credit tiers (up to 10.9% when paired with universities). This mirrors a broader shift across the U.S.—as more states recognize the ROI of innovation incentives.
Michigan: R&D Credit Reinstated
Fully refundable
- Bonuses for university collaboration
- Funded by a new $60 million Innovation Fund
Connecticut: Startup and Biotech Incentives
Refund value raised from 65% to 90%
- Available to companies with less than $70M in revenue
Virginia: Two-Tiered Credit, Expanded Caps
Offers both refundable and non-refundable options
- Simplified access for new filers
Other States with Competitive Programs
Several other states already offer competitive R&D tax incentives. California, Arizona, Minnesota, Georgia, Rhode Island, and Pennsylvania provide layered or refundable credits aligned with federal standards.
What’s Next
This trend creates new opportunities for CFOs to stack federal and state credits, amplify ROI, and fund innovation across multiple jurisdictions.
IRS and Legislative Updates: More Rigor, More Opportunity
Recent changes are helping CFOs plan better and claim more:
- Form 6765 (2024+) requires detailed project-level substantiation
- Section 174 rules currently require R&D amortization, but bipartisan support is mounting for restoring immediate expensing
- Pending legislation like the FIRST Act could double credit rates and permanently enshrine these incentives
Far from discouraging use, these changes validate the credit’s importance and make proactive planning essential.
CFO Action Plan: Maximizing R&D Tax Value
|
Action |
Impact |
|
Identify qualifying R&D across all departments |
Maximize scope of claim |
|
Create audit-ready documentation (logs, time sheets, testing data) |
Ensure defensibility |
|
Amend past returns (3-year lookback) |
Capture missed savings |
|
Layer state and federal credits |
Increase ROI |
|
Monitor legislative developments |
Stay ahead of rule changes |
Final Word for CFOs
In 2025, R&D tax credits are no longer “nice-to-haves.” They’re mission-critical financial levers. With federal proposals aiming to enhance credits, and states like Texas, Michigan, and Connecticut stepping up, CFOs have more tools than ever to convert innovation into capital.
For organizations looking to evaluate and enhance their R&D credit strategy, working with experienced advisors—such as the team at ABGi—can help ensure opportunities are maximized and compliance is airtight.
What was once seen as a niche incentive is now a proven engine for growth, liquidity, and competitive advantage.