Patents, Secrets, and Software: The IP Advantage in Securing R&D Tax Credits

A company holding granted patents or actively applying for a utility patent with the United States Patent and Trademark Office (USPTO) conducts research and development (R&D) activities that are inherently valuable—and likely tax-eligible.

Companies that successfully navigate the complex innovation landscape to secure intellectual property (IP) may stand to increase their cash flow and competitive advantage through R&D tax credits. First established in 1981, R&D tax credits are federal and state-level provisions offering a dollar-for-dollar reduction of tax liability.

This analysis explores why a company's IP development should be leveraged strategically to substantiate and maximize R&D tax credit benefits.

Patent Protection: Which Type Aligns with R&D Credits?

IP is a legal term referring to creations of the mind. In the context of R&D tax credits, there exists a critical distinction between patent types:

• Utility patents protect how a product works, is made, or is used. The R&D required to obtain one resolves significant technical challenges.
• Design patents protect only the ornamental appearance of a product.

Activities related to a design patent rarely qualify for R&D tax credits because they rely on aesthetic principles, failing the scientific requirement. Conversely, the work performed to earn a utility patent strongly indicates tax eligibility.

Safe Harbor: Utility Patents Strengthen R&D Tax Credit Claims

R&D activities and associated expenditures must pass the “four-part test” in 26 U.S. Code § 41 to qualify for R&D tax credits. 

The issuance of a utility patent offers a strategic advantage by satisfying two of the four requirements:

• Elimination of Uncertainty: Genuine technical uncertainty must exist at the start of the project regarding the innovation's capability, method, or appropriate design.
• Technological in Nature: The research must rely on the principles of a hard science (engineering, physics, computer science, etc.).

The "Patent safe harbor" provision in 26 CFR § (a)(3)(iii) establishes that the issuance of a utility patent is conclusive evidence that the company has met both the Technological in Nature and Elimination of Uncertainty requirements.

However, the R&D still must pass the remaining two subtests: Permitted Purpose (i.e. the intent to develop or improve a business component) and Process of Experimentation (i.e. the systematic evaluation of alternatives).

Software and Trade Secrets: Qualifying R&D Without USPTO Filing

Not all valuable IP is patented. R&D Tax Credits also accommodate other forms of proprietary information.

Copyright protects artistic expression.

• Many copyright-protected materials fail the Technological in Nature test. However;
• Software is considered a literary work under U.S. copyright law. As long as the development activities and associated expenses (e.g. developer wages or hosting costs) pass the four-part test, the software's R&D still qualifies.

Trade secret protection accommodates confidential business information.

• Many companies protect their proprietary information as a trade secret. The secret could be anything, from a manufacturing process to the formula for Coca-Cola®.
• R&D activities that lead to a trade secret likely qualify for R&D tax credits, even if the business never files for formal IP protection.
• The costs associated with developing or improving these secret innovations can be a significant source of QREs.

IP Strategy Fuels Financial Gain

Successful R&D, IP, and tax strategies are inherently linked. Holding a utility patent provides companies with conclusive evidence that key R&D activities meet two challenging qualification criteria. The associated R&D expenses must also pass the four-part test to be considered qualified research expenditures (QREs).

By accurately tracking the contract research, wages, and supplies that contributed to securing patents, trade secrets, and proprietary software, a company rewards its past innovation and advances its financial positioning for future market dominance.

Maximize Your Claim: Partner with Acena's Experts

Optimize your tax strategy. Schedule a free consultation with Randy Eickhoff, CPA, Acena Consulting's Founder & Head Coach, for expert guidance.

Register for our free monthly webinar, next on Oct. 21, 2025: Cracking the (Tax) Code for R&D.

• This workshop provides one CPE credit for professionals who are keeping up with continuing education.
• Learn more about qualifying and documenting R&D activities for tax incentives.

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Co-written by Rae Fox-Smoltz, BSBA, BSENRE, Project Manager (Head of R&D) at Acena Consulting.

Photo courtesy of cytech on Flickr.