Many businesses owners in nearly every industry are unaware that federal and state research and development (R&D) tax credit programs exist and that their day-to-day operations aimed at producing and improving products and processes may qualify for a dollar-for-dollar reduction of their income tax liability. The Federal R&D Tax Credit, first enacted in 1981, has been one of the most valuable credits leveraged by both private and public companies of all sizes. Every year, the R&D credit yields billions of dollars in federal and state benefits to companies engaged in qualifying research.
What industries can advantage of the R&D tax credit?
Thousands of companies take advantage of the R&D credit across numerous industries including, but not limited to:
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What activities qualify for the R&D tax credit?
Federal and state R&D tax credits are available to any company that designs, develops or improves products, processes, techniques, inventions, formulations or software. Activities that may qualify your company include, but not limited to:
- Development of new manufacturing processes
- Testing an experimental product, process, formula, or software
- Participating in the engineering, design or development of a new product
- Developing experimental models & prototypes
- Beta testing
- Technical design reviews
- Experimenting with new technologies
- Creating more efficient and environmentally friendly designs
Which expenses qualify for the R&D tax credit?
Many do, including W-2 taxable wages for employees working on, supervising or supporting the research, supplies used or consumed during the research, and certain subcontractor expenses (provided the contractor’s tasks would qualify if they were instead being performed by an employee).
What is the IRS eligibility criteria for the credit?
To be eligible for the credit, your R&D expenses must meet the IRS's Four-Part Test:
- Eliminate uncertainty. A business must demonstrate that it attempted to eliminate uncertainty about the development or improvement of a product of process.
- Process of experimentation. A business must demonstrate—through modeling, simulation, systematic trial and error, or other method—that alternatives were evaluated for achieving the desired result.
- Technological in nature. The process of experimentation must rely on the hard sciences, such as engineering, physics, chemistry, biology, or computer science.
- Qualified purpose. The research’s purpose must be to create a new or improved product or process, resulting in increased performance, function, reliability or quality.
Benefits of the R&D Tax Credit
- Up to 13.5 cents of R&D tax credit for every qualified dollar
- Dollar-for-dollar reduction in income tax liability
- Improved cash flow
- Reduction of effective tax rate
- Credit carried forward up to 20 years
- Available retroactively to recognize unclaimed credits from previous tax years
RESEARCH & DEVELOPMENT (R&D) TAX CREDITS
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