Rewarding Research and Experimentation
The Credit for Increasing Research Activities (“The R&D Tax Credit”) is a general business tax credit that can be used to offset corporate tax liabilities.
The R&D tax credit is used to reduce income tax liabilities of small to medium sized businesses. The money saved enables them to put funds back into their business to improve products or processes.
The research tax credit was originally introduced by Congress in 1981 to encourage U.S.-based companies to develop new and improved products, processes or software. In addition to the federal tax credit, many states provide their own R&D tax credit.
Many companies involved in these industries are not aware that they are conducting activities that qualify them for federal and state R&D tax incentive programs. The most common misconceptions are that research and development must be conducted in laboratory environments or it must involve patentable products or processes.
R&D tax credits can amount to as much as 20% of the costs incurred in developing or improving products, fabrication processes and software, yet fewer than 5% of America’s manufacturers and technology companies with revenue less than $100M claim the R&D credit.
Qualifying research and development, as it relates to the R&D tax credit, pertains to the development or improvement of products, fabrication processes and software.
The federal R&D tax credit is a computed proportion of the Qualifying Research Expenses (QREs). The proportion or amount of the credit depends on several factors and is calculated using either the Regular Credit (RC) method or the Alternative Simplified Credit (ASC) method.
Additionally, the credit can now be used to offset payroll and alternative minimum tax (AMT) liabilities. This credit can benefit small or young companies that don't have an income tax liability or is too small to absorb the entire credit.
Because R&D Tax Credit is a specialty area within the tax code that is very complex, many companies have never taken advantage of this lucrative tax credit, even though they qualify.