Posted by Robert Hancock on 03.27.25

Healthcare businesses that develop software for the industry across the US are often missing out on federal research and development (R&D) tax credits. This credit is designed to reward companies for increasing their investments in research and development. However, many healthcare companies developing software may not realize they could qualify for this incentive.

The R&D tax credit provides a dollar-for-dollar offset against federal income or payroll taxes paid or owed, potentially saving businesses thousands of dollars. It can be applied in various ways, including to future and past income tax liabilities and, for some startups, to payroll taxes. 

What is the R&D Tax Credit? 

First enacted by Congress in 1981, the credit for Increasing Research Activities, or the R&D tax credit, serves as a federal tax incentive for businesses to increase their investments in research and development. Under Section 41 of the Internal Revenue Code, this credit allows qualifying taxpayers to reduce their tax liability based on their annual Qualified Research Expenses (QREs). QREs encompass specific expenses incurred while conducting Qualified Research Activities (QRAs). 

Federal research and development (R&D) tax credits can deliver an immediate and significant benefit to a company as a result of innovative activities. While the tax credit originally pertained to basic research expenses, such as those occurring in a laboratory setting, subsequent modifications have simplified the credit and made it available to a wider variety of businesses. Hundreds of activities now qualify for this powerful tax savings tool. 

R&D tax credits can immediately benefit a company in several ways: 

• Source of cash for reinvestment or other needs 
• Significant reduction to current and future tax liabilities 
• Credits may carry forward up to 20 years 

For healthcare businesses that may qualify, it is crucial to maintain thorough records and understand which expenses can qualify for a tax credit. You must demonstrate how your activities meet the tax credit's criteria. Documentation should include project descriptions, timelines, technical design documents, and financial records related to R&D expenditures. 

Accurate validation of when research and development begins and ends is critical, as it significantly impacts the size of a research tax credit claim. Consulting with Tax Point Advisors, a firm who specializes in R&D tax credits can help clarify these parameters and ensure that proper documentation is created and retained. 

How Can Software Developers in Healthcare Businesses Benefit from the Credit? 

Contrary to some misconceptions, a wide range of activities qualify as Qualified Research Activities (QRA) and may be eligible for the research tax credit. Eligibility is not restricted to basic research, new product development, or laboratory research; it also includes activities aimed at improving or enhancing existing products, software, or manufacturing processes. 

Examples of healthcare related activities that could qualify for the research tax credit include: 

• Developing new software to enable physicians to deliver care services 
• Creating software applications such as patient portals, billing platforms, and appointment systems 
• Innovating technologies for telemedicine, patient engagement, or compliance with HIPAA and industry standards 
• Developing Internet of Things (IoT) devices for medical applications 
• Designing communication protocols, APIs, and other methods for sharing information between legacy systems and new software applications 
• Implementing electronic medical record systems 
• Developing payer/provider analytics or data tools 

Qualifying R&D expenses may include: 

- Wages for developers, engineers, programmers, or architects involved in software, hardware, systems, or applications 

- Wages for lab or maintenance technicians, clinical support specialists, drug safety specialists, data analysts, and others 

- Cloud-based environments used for R&D 

- Contract research expenses 

Find Out if Your Activities Qualify 

Taking advantage of the federal R&D tax credit can substantially reduce the cost of research and development for software developers in healthcare organizations, enabling them to allocate more resources toward innovation and improving patient care.  It is understandable that you may not be certain about whether a particular activity qualifies. You may also need the help of a professional to help you document all of your R&D activities. Your CPA or qualified R&D tax credit expert can help you determine whether your business activities meet the criteria of the test by conducting a tax credit study. 

Now is the time to consider whether activities performed by your company qualify for major cash-saving tax credit opportunities. To learn more about whether your company activities meet the R&D four-part test, request a free assessment to determine qualifying R&D tax credit eligibility.

Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, contact us at (800) a260-4138, or please leave us a message below.