Many healthcare organizations qualify for Research & Development tax credits without realizing it. The credit is often associated with pharmaceutical research, medical devices, and other obvious forms of scientific development, but its scope is considerably broader. Healthcare organizations may be eligible based on work they are already doing, including software development, systems integration, process improvements, and other technical projects.
The R&D tax credit has existed since 1981 and was designed to encourage domestic research and development across virtually every industry. But starting with 2022 tax returns, the R&D credit was undercut by a provision of the 2017 Tax Cuts and Jobs Act, which forced companies to amortize R&D expenditures over five years instead of deducting them immediately. That rule made the credit less attractive in practice since the cash benefit was spread out rather than realized upfront.
When the One Big Beautiful Bill Act (OBBBA) was signed in July 2025, it reversed that. Under the new IRC Section 174A, domestic research and experimental expenditures are once again fully deductible in the year they’re incurred.
OBBBA also built in retroactive relief. Smaller businesses meeting the Sec. 448(c) test for average annual gross receipts of $31 million or less had the option to amend tax returns filed as far back as 2022 , though the election window for doing so closed on July 6, 2026. That path allowed them to reverse the capitalization rule and claim refunds for taxes already paid. Larger businesses cannot amend prior returns in the same way, but they can deduct any remaining unamortized R&D costs from 2022 through 2024.
After the OBBBA was signed into law, the IRS followed up with Revenue Procedure 2025-28 in August 2025, which spells out how small businesses make the retroactive election and how it interacts with Section 280C’s rule against “double-dipping” between the R&D deduction and the credit itself.
For healthcare organizations that assumed the credit wasn’t worth pursuing under the old amortization rules, this is an strong reason to revisit that decision.
To qualify, an R&D activity has to meet a four-part test:
- It must aim to improve a product, process, or piece of software.
- It must involve genuine technical uncertainty — you don’t know in advance whether your approach will work.
- It must follow a systematic process of experimentation, testing different approaches to resolve that uncertainty.
- It must rely on principles of hard science, such as engineering or computer science.
The requirements do not demand that the research work be groundbreaking, or even successful. A project that doesn’t achieve its intended goal can still generate qualifying expenses, as long as the process of experimentation is legitimate.
The big mistake is in thinking that only “successful, industry-first” innovation counts; it’s the most common reason we see eligible healthcare companies leaving this credit on the table.
Where This Shows Up in a Healthcare Organization
Some of the most common qualifying activities in the healthcare industry involve internal-use software: building or improving billing platforms, scheduling tools, patient portals, or Electronic Health Record (EHR) integrations. Because these systems are typically developed for a company’s own internal use rather than for sale, they’re subject to a higher bar under Sec. 41(d)(4)(E): the “high threshold of innovation” test. Beyond meeting the standard four-part test, the software must be innovative, involve significant economic risk, and not be commercially available. This means that routine platform customization or off-the-shelf configuration generally won’t qualify.
If an organization’s IT team spent months figuring out how to get two systems to talk to each other, or built custom logic to automate a compliance workflow, that work may well meet the four-part test.
Qualifying expenses extend beyond the software itself. They can include:
- Taxable wages for employees who perform, supervise, or support the R&D work
- Costs of supplies used in the development process
- A share of payments made to outside contractors or researchers
- Some cloud and server costs tied directly to development
Some activities do not qualify, including routine data collection, general market research, ordinary management functions, consumer preference testing, and research conducted outside the U.S.
One exciting, but underused, feature of the credit, which becomes especially useful for smaller or newer healthcare organizations, is found within the PATH Act of 2015. Under this act, qualified small businesses can apply the R&D credit against payroll taxes instead of income taxes. A startup health tech company or a newly formed physician group which has not yet turned a profit, and has no income tax liability, can still derive real financial benefit from the credit, since it still owes payroll tax.
To qualify for the payroll tax offset, a company needs under $5 million in gross receipts for the credit year and no gross receipts in any year before the five taxable years ending with the credit year. That profile fits a lot of newer healthcare ventures: recently launched physician groups, health tech spinoffs, or specialty practices still in their early growth years.
Eligible companies can apply up to $500,000 per year toward payroll taxes; up to $250,000 against the employer share of Social Security tax and, for tax years beginning after December 31, 2022, an additional $250,000 against the employer share of Medicare tax. Over five years, that’s a potential $2.5 million in savings.
In addition to the federal R&D credit, many states, including New York, California, Massachusetts, New Jersey, and Illinois, among others, offer their own R&D credit programs that can stack on top of the federal benefit. State credits generally follow similar eligibility criteria but use a separate calculation, so qualifying federally often means qualifying at the state level too. Depending on the state, these credits may be refundable or transferable, which can provide a cash benefit even for organizations without state tax liability.
Documentation Requirements
The core requirement is identifying which employees performed, supervised, or supported qualifying work, and documenting the technical challenges they addressed. Healthcare organizations frequently already have this evidence embedded in normal operations: project descriptions, email threads, technical notes, timesheets, and internal memos. Clinical teams keep project logs. Revenue cycle teams document system changes. IT teams maintain development tickets. This documentation is often accessible and straightforward.
The credit is reported on Form 6765, and if it is being applied against payroll taxes, that offset becomes available starting the quarter after the return is filed.
*
The R&D tax credit was never designed exclusively for pharmaceutical companies, device manufacturers, or healthcare companies with dedicated research budgets. With OBBBA restoring immediate expensing under Section 174A, opening the door to retroactive refunds back to 2022, and leaving the PATH Act payroll tax offset in place, the credit has become more accessible and more valuable to small and mid-sized healthcare organizations.
For healthcare organizations, the key question is whether they engage in activities that involve innovation and technical problem-solving. If they are, the credit is already on the table.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
