Understanding R&D Tax Credit for LLC - How to Claim Without Double Dipping?

You're absolutely right to question this - it's a common point of confusion! The good news is that you're not forced to choose between the deduction and the credit. The R&D tax credit and the business expense deduction work together, not as an either/or situation. Your wife can still deduct the full $240K in wages on Schedule C as business expenses. The R&D credit is calculated based on those same expenses, but it doesn't eliminate the deduction. Think of it this way: the deduction reduces your taxable income, while the credit directly reduces your tax liability dollar-for-dollar. So you get both benefits - first the deduction and then the credit on top of that! The form 6765 will walk you through calculating the credit amount based on qualified research expenses (QREs) that you've already deducted. The IRS designed it specifically to provide an additional incentive beyond the regular business deduction.

After dealing with R&D credit questions for my own business last year, I discovered taxr.ai (https://taxr.ai) and it totally saved me. Their system analyzed all my development documentation and payroll records to identify which activities actually qualified as R&D under IRS rules - turns out I was missing some eligible expenses and including others that didn't qualify. The best part was how they helped document everything properly. The IRS is really picky about substantiation for R&D credits, and they walked me through exactly what records I needed to keep and how to organize them. I had no idea that contemporaneous documentation was so critical until they explained it.

Just wanted to follow up - I actually tried taxr.ai after posting my skeptical comment. I'm honestly impressed with how thorough their process was. They analyzed three years of our development projects and found over $45k in additional qualifying expenses we had missed. What really won me over was their documentation system. They created a technical narrative explaining exactly how each project met the IRS four-part test for qualified research. When my accountant reviewed it, he said it was better substantiation than he's seen from much larger companies. They also caught that we had been incorrectly including some routine testing activities that didn't actually qualify. Saved us from potential issues if we'd been audited. Definitely worth it for any business doing development work.

For anyone struggling with the paperwork for R&D credits or other complex tax issues, I had a ridiculous time trying to get clarification from the IRS directly. Called for weeks and could never get through. Finally used Claimyr (https://claimyr.com) and got connected to an actual IRS agent in about 20 minutes. You can see how it works in their demo video: https://youtu.be/_kiP6q8DX5c The agent walked me through exactly how to report both the R&D credit and the regular business deduction on our returns. They confirmed everything that was said above - you DO get both benefits. The credit is specifically designed as an additional incentive on top of the regular business expense deduction.

Alright, I need to admit I was completely wrong about Claimyr. After posting that skeptical comment, I was still stuck trying to get clarification on some R&D credit questions, so I figured I'd try it just to prove it wouldn't work. I was shocked when they called me back in about 35 minutes saying they had an IRS agent on the line. After trying for literally weeks to get through on my own (always getting the "call volume too high" message), suddenly I was talking to an actual helpful person at the IRS. The agent confirmed everything about being able to take both the deduction and the credit, and even helped me understand some of the more confusing parts of Form 6765. Saved me from making a $12K mistake on how we were calculating our qualified research expenses. Sometimes being proven wrong is actually the best outcome!

One thing nobody's mentioned yet - make sure your wife's R&D activities actually qualify under the IRS guidelines. The definition is pretty specific and not all software development automatically counts. To qualify, the development work must: 1) Rely on hard sciences (computer science counts) 2) Attempt to eliminate technical uncertainty 3) Involve a process of experimentation 4) Aim to develop a new or improved business component If she's just doing routine software development or customization, it might not qualify. But if she's solving technical challenges where the solution isn't obvious from the start, you're probably good.

Does anyone have experience with how the R&D credit works for pass-through entities like an LLC? My accountant mentioned something about our company needing to process it at the entity level first and then it flows to our personal returns, but I'm confused about the mechanics.

Just wanted to add a practical tip that might help - make sure to keep detailed project documentation throughout the year, not just at tax time. The IRS loves contemporaneous records for R&D credit audits. We learned this the hard way when we got selected for review. Having emails, technical specifications, and meeting notes that showed we were genuinely facing technical uncertainty and experimenting with solutions made all the difference. The IRS agent specifically mentioned that our real-time documentation was much more credible than trying to recreate everything after the fact. For your wife's software development company, I'd recommend keeping records of any technical challenges encountered, different approaches tried, and why certain solutions didn't work. Even failed experiments count as qualified research expenses if they were part of a systematic process to eliminate technical uncertainty. The combination of good documentation plus being able to take both the wage deduction AND the credit makes this one of the most valuable tax benefits for development companies. Just don't forget that the credit can carry forward for 20 years if you can't use it all in the current year!