R&D Tax Credit Example: $2M Revenue Business

Last reviewed October 14, 2026

How much could a small technology company with $2 million in gross receipts claim in R&D tax credits? This page walks through a realistic, step-by-step calculation — from identifying qualifying employees to computing the final credit under both the ASC and Regular methods.

Company profile

Our example company is a small software and engineering firm in its third year of claiming the R&D credit. Here are the key details:

• Industry: Custom software development and engineering services
• Gross receipts: $2,000,000
• Total employees: 12
• Claiming history: 3rd year claiming the credit (prior-year QRE data available)
• Activities: Developing new software platforms, improving existing products, and designing engineering prototypes

Step 1: Identify qualifying employees and R&D time

Not every employee performs qualifying research activities. For each employee involved in R&D, you determine what percentage of their time is spent on qualified research. The qualifying portion of their wages becomes a qualified research expense (QRE).

In TaxCredit4U, you enter each employee, their annual wages, and their estimated R&D time percentage. The platform uses this information to calculate your wage-based QREs.

Total qualifying wages: $413,500

The remaining six employees (sales, admin, operations) do not perform qualifying R&D activities and are not included in the credit calculation.

Step 2: Add contractor and supply costs

Beyond employee wages, two other categories of spending can qualify as QREs:

Contract research expenses

The company hired an outside contractor to build a specialized API integration. The total contract was $60,000. Under IRC §41, only 65% of contract research expenses count as QREs:

$60,000 × 65% = $39,000 contractor QRE

Supply costs

The company spent $15,000 on cloud hosting and development infrastructure used directly in R&D activities (dedicated development and testing environments, CI/CD pipeline resources). These qualify as supply QREs at 100%:

$15,000 supply QRE

Step 3: Total QRE calculation

Adding all three categories together:

Step 4: Credit calculation — Alternative Simplified Credit (ASC)

The ASC method is the more commonly used approach. The formula is:

Credit = 14% × (Current-year QREs − 50% × Average of prior 3 years’ QREs)

Since this is the company’s third year claiming, we have prior-year QRE data:

• Year 1 QREs: $380,000
• Year 2 QREs: $410,000
• Year 3 QREs (current): $467,500

Average of prior two years with data available (years 1 and 2): ($380,000 + $410,000) ÷ 2 = $395,000

Note: If the company had three full prior years of QRE history, all three would be averaged. Here we use the available data.

Now apply the formula:

• 50% of average prior QREs: $395,000 × 50% = $197,500
• Current QREs minus base: $467,500 − $197,500 = $270,000
• Credit: $270,000 × 14% = $37,800

Step 5: Credit calculation — Regular Research Credit (for comparison)

The Regular method uses a different formula based on a fixed-base percentage. The formula is:

Credit = 20% × (Current-year QREs − Base amount)

The base amount is the greater of: (a) the fixed-base percentage × current-year gross receipts, or (b) 50% of current-year QREs.

For a company in its first few years of claiming (start-up period), the fixed-base percentage is set at 3% for years 1–5. Using this rate:

• Fixed-base percentage × gross receipts: 3% × $2,000,000 = $60,000
• 50% of current-year QREs: 50% × $467,500 = $233,750
• Base amount (the greater of the two): $233,750
• Current QREs minus base: $467,500 − $233,750 = $233,750
• Credit: $233,750 × 20% = $46,750

Step 6: The result — your expected credit range

For this $2 million revenue company, the R&D tax credit falls in the range of:

The company would choose whichever method produces the larger credit. In this example, the Regular method yields $46,750, while the ASC produces $37,800. Your optimal method depends on your specific numbers — TaxCredit4U walks you through a questionnaire to help determine which method is best for your situation.

Key takeaway

Even a relatively small company with $2 million in revenue can receive $30,000 to $80,000 or more in annual R&D tax credits. The exact amount depends on how many employees perform qualifying work, what percentage of their time qualifies, and your contractor and supply spending. Companies with higher R&D intensity or more qualifying employees will see credits toward the upper end of that range.

Payroll tax offset

If your company is a qualified small business — meaning gross receipts under $5 million and no gross receipts more than five years ago — you may be able to apply up to $500,000 of the credit against payroll taxes instead of income taxes. This is especially valuable for startups that do not yet have income tax liability. See Startup Payroll Tax Credit for details on eligibility and how to elect this option on Form 6765.

Frequently asked questions

Is this R&D tax credit example realistic?

Yes. The wages, contractor costs, and R&D time percentages used in this example reflect a typical small technology company with $2 million in gross receipts. Your actual numbers will vary based on your specific employees, activities, and costs.

What if my company has higher or lower revenue than $2 million?

The R&D credit scales with your qualifying research expenses, not your revenue directly. A company with $1 million in revenue could have higher QREs than one with $5 million if it spends more on R&D. See How Much Is the R&D Tax Credit Worth? for examples across different business sizes.

Can I claim the R&D tax credit for prior years too?

Yes. You can file amended returns to claim the R&D credit for up to three prior open tax years. This means if you have never claimed before, you could potentially recover credits for the current year plus three prior years.