Most e-commerce owners see investing in their website, adding new features, or enhancing the customer experience as the price of staying competitive. They pour thousands into developers, designers, and technology without realizing the government is willing to help cover part of that cost.

The reality: if you’re running an e-commerce business and investing in technology to improve your products, processes, or customer experience, you may be eligible for R&D tax credits that can put thousands back in your pocket.

Take Marcus, who runs a Shopify store and sells on Amazon, generating about $850K in annual revenue. Over two years, he spent $95,000 improving his checkout process, creating a loyalty program, and developing better product search functionality. His accountant treated these as ordinary expenses. When Marcus learned about the R&D tax credit through Town, he realized he had missed out on roughly $7,500 in credits — money he could have put toward inventory or marketing.

What Are R&D Tax Credits and Why Should E-Commerce Owners Care?

The Research and Development (R&D) tax credit — officially called the Credit for Increasing Research Activities under IRC Section 41 — is one of the most valuable incentives available to small businesses. Unlike a deduction, which lowers taxable income, this is a dollar-for-dollar credit that directly reduces the tax you owe.

For e-commerce businesses, the benefit usually falls in the 6%–8% range of qualifying expenses. In practical terms, if you spent $100,000 on eligible development projects, you could receive $6,000 to $8,000 in credits.

The credit was made permanent in 2015 through the Protecting Americans from Tax Hikes (PATH) Act. The IRS’s rules are designed to make sure the credit supports real technological progress — not just routine operations.

And thanks to the OBBBA, it’s even more valuable now: businesses can once again fully expense R&D costs up front instead of spreading them out over five years. For e-commerce owners, that means the tax benefit of software development and platform improvements is doubled — immediate deductions plus R&D credits on the same spend.

2025 Updates: What E-Commerce Owners Need to Know

Two big changes make 2025 a turning point for businesses claiming the R&D credit: tougher IRS reporting rules and the return of full R&D expensing.

New IRS Reporting Rules: The IRS has increased the level of detail required for certain R&D credit claims:

• Enhanced Form 6765 Requirements: Businesses with more than $1.5 million in qualified research expenses must now complete detailed Section G reporting.

• Project-Level Documentation: Companies must clearly describe each qualifying research activity, the technological information they were trying to discover, and a breakdown of related expenses by business component.

• Higher Audit Risk: With greater scrutiny on R&D claims, maintaining thorough documentation is essential.

Relief for Small and Mid-Sized Businesses: If your qualified research expenses are $1.5 million or less and your gross receipts are under $50 million, you can opt out of these expanded reporting requirements, keeping compliance manageable.

Restored R&D Expensing: The Act of 2025 (formerly OBBBA) permanently restored full expensing of R&D costs under IRC §174. This repeal of the unpopular five-year amortization rule means software development and platform improvements are once again deductible up front. When combined with the R&D credit, the result is a powerful one-two punch: immediate deductions plus tax credits on the same spend — making technology investments more valuable than ever for e-commerce businesses.

Looking Ahead to 2026: Think of the new rules as a chance to level up how you run projects. Make documentation part of your 2026 playbook: jot down project goals before kickoff, capture the technical hurdles as they pop up, and track developer time as it happens. When you buid these habits into your workflow, compliance stops feeling like busywork — and you’ll be ready to claim every dollar of credit you’re entitled to next year.

Does Your E-Commerce Business Qualify?

The IRS uses a four-part test to decide whether activities qualify for the R&D credit. The goal isn’t to make things harder — it’s to make sure the credit rewards real innovation, not routine business activities. Most e-commerce development projects fit these criteria more easily than owners expect.

The Four-Part Test

1. Permitted Purpose: Your activity must relate to developing or improving a business component — such as a product, process, software, technique, formula, or invention. For e-commerce businesses, this often includes:

• Developing new website features or mobile apps

• Improving checkout processes or user experience

• Creating inventory management systems

• Building customer analytics tools

• Enhancing security features

2. Technological in Nature: The development must be grounded in engineering, computer science, or other hard sciences. Since e-commerce relies so heavily on software, this requirement is usually straightforward.
   
   

3. Elimination of Uncertainty: You must have faced a technical challenge about how to achieve your desired outcome. This doesn’t mean your work had to be groundbreaking — only that, at the start, you weren’t sure of the best way forward.
   
   

4. Process of Experimentation: You must have tested and evaluated different approaches to resolve those uncertainties. For e-commerce, this often looks like A/B testing, prototyping, iterative development, or comparing alternative technical solutions.

Why This Matters: These rules exist to separate true R&D from routine business operations. In practice, that means many activities e-commerce owners overlook — like customizing off-the-shelf platforms, integrating systems, or running A/B tests — often qualify. The key is recognizing and documenting them as part of the R&D process.

Common Misunderstandings About R&D Credits in E-Commerce

Even though the R&D tax credit has been around for decades, e-commerce owners often misinterpret how it applies to their businesses. Here are three of the biggest blind spots:

1. Misunderstanding “Technological Uncertainty”: The IRS requires that qualifying projects face some level of “technological uncertainty.” Many e-commerce owners assume this means inventing brand-new, proprietary technology. That’s not the case.

The e-commerce reality:

• Integrating disparate systems: A huge amount of R&D involves figuring out how to connect different systems — your e-commerce platform with a new 3PL, a custom CRM, or a unique payment gateway. The uncertainty lies in making them work together reliably and efficiently.

• Customizing off-the-shelf platforms: Using Shopify or Magento alone doesn’t qualify. But the moment you write custom code to extend its core functionality — like building a dynamic pricing tool, a custom app for product configuration, or a new checkout flow — you’ve entered R&D territory.

• “We didn’t invent it” is irrelevant: The IRS doesn’t require your work to be groundbreaking for the industry. It only has to be new to your business and involve technical challenges in implementation.

2. Overlooking the “Process of Experimentation”: E-commerce businesses experiment constantly but rarely think to frame it that way. The IRS definition of experimentation is broad — and it covers much more than lab coats and prototypes.

The e-commerce reality:

• A/B Testing: Testing different checkout flows, search algorithms, or page layouts is a textbook example of experimentation.

• Trial and Error: Developing features almost always involves iteration. A prototype fails, you revise, you test again. That cycle itself is qualifying activity.

• Failed Projects Still Qualify: Even if a project is abandoned, the expenses spent trying to resolve the technical uncertainty can count toward the credit.

3. Underestimating Qualifying Expenses: Another common mistake is only thinking about developer salaries. In reality, qualifying research expenses (QREs) reach much further.

The e-commerce reality:

• Contractors and Freelancers: Payments to outside developers or agencies often qualify — typically at 65% of the cost.

• Supplies: For e-commerce, “supplies” can include cloud computing costs (like AWS or Google Cloud for testing), development tool licenses (like Jira, GitHub, or QA software), and third-party APIs used in the project.

• Employee Time Beyond Developers: It’s not just engineers. If a CTO, project manager, or designer spends part of their time on technical problem-solving, a portion of their wages may qualify too.

Common E-Commerce Activities That Qualify

Many of the projects e-commerce businesses already invest in fit squarely within the IRS’s definition of qualified research activities. Here are some of the most common examples:

Website and Platform Improvements

• Customizing e-commerce platforms beyond standard templates

• Developing improved checkout or payment processes

• Creating custom product configurators or recommendation engines

• Building mobile-responsive features or standalone mobile apps

• Integrating with shipping, payment, or inventory management systems

Customer Experience Enhancements

• Developing loyalty programs or customer portals

• Building automated email marketing or communication tools

• Creating custom search or filtering functionality

• Developing subscription or recurring billing features

Operational Improvements

• Automating inventory management processes

• Building custom reporting or analytics tools

• Developing fraud prevention or enhanced security features

• Integrating multiple sales channels or marketplaces into one platform

Important Note: Routine website maintenance, simple plug-and-play software integrations, or implementing off-the-shelf solutions typically don’t qualify. But the moment you start writing custom code, integrating systems in a non-standard way, or experimenting with new functionality, you’ve likely crossed into R&D territory.

What Expenses Count Toward the Credit?

The R&D credit is based on Qualified Research Expenses (QREs). For e-commerce businesses, these often include:

• Employee Wages: Salaries for developers, engineers, designers, or other technical staff — but only the portion of their time spent on qualifying R&D activities.

• Supplies and Tools: Materials consumed during research, which for e-commerce often means cloud computing costs (like AWS or Google Cloud for development environments), software licenses for testing or version control, and other technical tools.

• Contract Research: Payments to outside developers, agencies, or consultants for qualifying projects. Under IRS rules, typically 65% of contractor costs count toward the credit.

What doesn’t qualify?: The IRS excludes routine business costs or activities not tied directly to technological development, such as:

• General overhead (rent, utilities, administrative salaries)

• Marketing expenses, advertising campaigns, or customer surveys

• Cosmetic updates like changing fonts, colors, or layouts without technical development

• Testing or bug fixes performed after a product or feature has been fully released to customers

• Purchasing or configuring off-the-shelf software without customization

The gray area: Testing that’s part of the development process (like prototyping, QA during build-out, or pre-release beta testing) can qualify, since it helps resolve technical uncertainty. But once the feature is live and you’re fixing issues as part of regular maintenance, those costs are no longer eligible.

Special Benefits for E-Commerce Businesses

E-commerce businesses often have unique advantages when it comes to claiming R&D credits:

• Manageable Documentation: Smaller operations usually run fewer, more focused projects, which makes it easier to track activities and expenses.
  
  

• Higher Impact: R&D credits often offset a larger share of tax liability for businesses of this size, creating meaningful savings.
  
  

• Carryforward Provisions: If you can’t use all your credits this year, they don’t go to waste. Unused credits can be carried forward for up to 20 years, ready to offset future profits.
  
  

• Retroactive Claims: You may be able to recover missed credits by amending prior returns — typically up to three years back, or longer if you had losses. That can mean thousands in refunds.
  
  

• Payroll Tax Offset for Startups: If your business is still in growth mode and doesn’t yet have much income tax liability, you can use the R&D credit to reduce up to $500,000 of payroll taxes each year. This feature allows e-commerce startups to benefit immediately instead of waiting until they’re profitable.

Real-World E-Commerce R&D Credit Examples

Seeing how the credit works in practice makes the impact clearer:

• Sarah’s Online Boutique ($420K revenue): Sarah invested $35,000 developing a custom size recommendation tool and improving her mobile checkout. Result: a $2,800 R&D credit, directly reducing her income tax bill.
  
  

• Alex’s Specialty Food Business ($650K revenue): Alex spent $60,000 building a subscription management system and developing automated reorder reminders. Result: a $4,800 credit, applied against income taxes owed.
  
  

• Marcus’s Home Goods Store ($850K revenue): Marcus invested $95,000 in website improvements, customer loyalty features, and product search functionality. Result: a $7,500 R&D credit, lowering his tax liability.
  
  

• Lena’s Eco-Friendly Startup ($220K revenue, pre-profit): Lena’s team spent $50,000 building a custom Shopify app to manage subscription box deliveries. With no income tax liability yet, she applied the credit against payroll taxes, reducing her quarterly payroll tax bill by $12,500 and freeing up cash flow to hire another developer.

Common Mistakes That Cost E-Commerce Owners Money

Even when businesses qualify for the R&D credit, many lose out by making avoidable mistakes in how they track and claim it. The most common pitfalls are:

1. Assuming Only “High-Tech” Companies Qualify: Too many e-commerce owners think credits are reserved for Silicon Valley–style innovation. In reality, routine customizations — like building new checkout flows or integrating sales channels — often qualify. Treasury regulations in recent years have made it clear that many more taxpayers can claim the credit than most assume.
   
   

2. Poor Documentation: The IRS doesn’t just want to know you built something — they want proof of how and why. The biggest risk is failing to keep project notes, technical specs, or testing records. Start documenting now, and remember you can claim retroactively for up to three years (or longer if you had losses).
   
   

3. Not Tracking Developer and Contractor Time: E-commerce businesses often rely on freelancers or agencies but don’t track which hours went toward solving technical challenges. Without time records, you can lose thousands in qualifying expenses.
   
   

4. Relying on Generalist Accountants: Many CPAs focus on standard deductions and aren’t trained to dig into R&D credits. Without a specialized R&D study, they may miss opportunities entirely or fail to document them properly — leaving credits on the table or raising audit risk.

How to Claim R&D Credits: A Step-by-Step Approach

Claiming the credit doesn’t have to be overwhelming if you break it into four manageable steps:

Step 1: Document Your Activities: Start building a habit of capturing project details as you go. Record:

• Project goals and the technical challenges you set out to solve

• Time employees and contractors spent on qualifying R&D work

• Expenses tied directly to those projects

• Testing methodologies, prototypes, or iterations you tried

Step 2: Identify Qualifying Expenses: Review your financials to pinpoint Qualified Research Expenses (QREs). For e-commerce businesses, this usually means:

• Payments to developers, designers, or technical freelancers

• Costs for custom website development and platform modifications

• Third-party integrations, API development, and related testing tools

Step 3: Calculate Your Credit: Use Form 6765 to compute the credit. You can choose between the Regular Research Credit and the Alternative Simplified Credit — most small businesses find the simplified method easier.

Step 4: File and Maintain Documentation: Attach Form 6765 to your tax return. Keep thorough documentation to support your claim — project notes, time tracking, invoices, and technical records. With the new 2025 IRS reporting requirements, strong documentation isn’t optional; it’s essential for substantiating your credit if the IRS asks questions later.

Pro Tip: Many e-commerce businesses invest in a professional R&D study to capture all qualifying activities and expenses. These studies not only maximize the credit but also ensure the documentation meets IRS standards — a safeguard if your claim is ever reviewed. In general, a study is worth the cost when the expected credit exceeds $20,000, since the additional savings usually outweigh the professional fees.

Working with Tax Professionals Who Understand E-Commerce

R&D credits are complex, and the stakes are high. With the IRS putting more scrutiny on claims, proper calculation and documentation are critical to securing — and keeping — the benefit.

At Town, our tax advisors focus on e-commerce businesses and understand the kinds of technology improvements that often qualify. We help business owners:

• Identify all qualifying activities and expenses (including areas generalist accountants often overlook)

• Maintain the documentation the IRS now expects

• Navigate the different calculation methods to get the most out of the credit

• Prepare for the possibility of an IRS review or audit

• Plan upcoming R&D projects to maximize credits in future years

Most e-commerce companies we work with discover they’ve been leaving money on the table from everyday improvements — like website customizations, platform integrations, or customer-facing features they never thought qualified.

Take Action: Maximize Your R&D Credits

For Current Year Planning:

• Start documenting R&D activities now — don’t wait until tax season

• Review development projects against the IRS four-part test

• Track employee and contractor time spent on qualifying activities

• Maintain project notes, technical documentation, and testing records

For Prior Years:

• Review the last three years of expenses for missed opportunities

• File amended returns to claim overlooked credits

• If you had losses, explore extended carryback provisions to unlock cash refunds

For Startups:

• Remember that you don’t need to be profitable to benefit — qualified small businesses can use the R&D credit to offset up to $500,000 of payroll taxes per year, giving you immediate cash flow relief while you grow.

Looking Ahead to 2026:

• The new documentation standards aren’t just about filing — they’re about planning. Build documentation into your workflow now (project goals, technical hurdles, time tracking) so every qualifying expense is captured in 2026.

Get Expert Help: The R&D credit is too valuable to leave half-claimed. With new 2025 reporting requirements and increased IRS scrutiny, working with specialists is essential. Contact Town to speak with a tax advisor who understands e-commerce businesses and can help you maximize your benefits while staying compliant.

Visit our resources page for more tax-saving strategies for e-commerce businesses, or learn more about Town's expertise in working with growing online retailers.

The bottom line: If you’re innovating to stay competitive, the government wants to help pay for it. Make sure you’re claiming every dollar you’re entitled to.

Disclaimer: This content is for informational and educational purposes only and should not be considered personalized tax advice. Tax laws are complex and subject to change, and individual circumstances vary. Strategies that work for one business may not be appropriate for another. For advice tailored to your situation, consult a qualified tax professional.