The Research and Development (R&D) Tax  Credit

The R&D Tax Credit was developed in 1981 with the goal of stimulating innovation and technological advancement within the U.S. by helping businesses offset the high costs of research and development.  After years of expiring and having to be renewed on an almost annual basis, the R&D Credit was finally made a permanent part of the tax code in 2015 as part of the Protecting Americans from Tax Hikes (PATH) Act.  The PATH Act also expanded the credit, making it more available to smaller and newer businesses..

 
 

Who is eligible for the R&D Credit?

The R&D Credit is underutilized by many eligible businesses that erroneously assume that their activities will not qualify.  Many taxpayers associate the words “research and development” with highly scientific or technological pursuits, or assume that the credit only applies to large corporations.  In reality, the credit is available to businesses of all sizes that are engaged in a wide range of specializations, including architecture, engineering, construction, and manufacturing.  Additionally, shareholders in S-corporations and similar types of pass-through entities may be eligible to claim the R&D Credit.

 

How does it work?

The R&D Credit is calculated on the basis of qualified research expenses (QREs), which include wages paid to employees who engage in R&D activities and amounts paid for supplies used in such activities.  Depending on which method of calculation the taxpayer uses, the credit amounts to a percentage of QREs over a certain base amount.  The credit is somewhat flexible: a business may elect to carry it back one year or forward twenty years as needed.


Qualifying expenses?

Wages, Supplies & Contract Research that meets the four-part test:

  1. Permitted Purpose:Intended to create or improve a product, process or software. 
  2. Technical In Nature:Relies on engineering, biology, physics or computer science. 
  3. Uncertainty:In capability, method, design, process or cost. 
  4. Process of Experimentation:Process to eliminate uncertainties (testing or evaluating alternatives, trial and error, etc.).

Additional Details

  • Dollar for dollar credit for 5-13% of Qualified expense can be use to reduce tax
  • R&D tax credits can be applied against Federal and most State returns
  • R&D credits can be applied to current and prior open tax years

 

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