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The Research & Development (R&D) Tax Credit

One of the best opportunities for companies to reduce their tax liability and put money back into their businesses. 

Companies ranging in both size and revenue are able to take advantage of the R&D Tax Credit.

It is one of the most powerful tax incentives, providing benefit at both the federal and state level. 

BACKGROUND

The Research and Development (R&D) Tax Credit is a unique and lucrative tax incentive. It helps to reduce current and future years of state and federal tax liabilities, resulting in a dollar-for-dollar offset on both state and federal income taxes based on R&D W-2 wages, R&D Supplies, and R&D Contractor Expenses. The credit offers an instant source of cash for small to medium-sized businesses and can be applied to all open tax years (3 years back federal) as well as the current tax year. It was implemented to target taxpayers that design, develop, or improve products, processes, techniques, formulas, or software. The Economic Recovery Tax Act (ERTA) was passed in 1981 and acted as an economic stimulus to promote domestic innovation. The R&D credit is calculated on the basis of increases in research activities and expenditures, and as a result, is intended to reward companies that pursue innovation with increasing investment. In addition to the federal R&D Tax Credit, many states also offer their own R&D Tax Credit benefits.

In addition to businesses being able to claim Federal R&D Tax Credits, 38 states provide for an R&D Tax Credit as well. 

As a reminder, even if a business's state of incorporation does not have the R&D Tax Credit or does not have state income tax, the business is still eligible to claim the Federal R&D Tax Credit.

When claiming the credit in a study, incentAdvise must

identify and substantiate a company's

Qualified Research Activities (QRAs)

and 

Qualified Research expenditures (QRes).

Qualified research is an activity* or project undertaken by a taxpayer that meets the Four-Part Test ascribed by the Internal Revenue Service:

 *Most activities must only be evolutionary to a company, not to the industry as a whole, to be considered true "R&D" as defined by the Internal Revenue Code. 

STEP 1:

Qualified purpose

  • You must create a new product, process technique, formula, invention, patent or software, or improve an existing one.

  • You must improve performance, functionality, quality, reliability, or cost.

STEP 2:

Technological in nature

  • The process of experimentation must rely on the hard sciences, such as engineering, physics, chemistry, biology, or computer science.

STEP 3:

Elimination of uncertainty

  • You must demonstrate that you have attempted to eliminate uncertainty about the development of improvement of a product or process.

STEP 4:

Process of experimentation

  • You must demonstrate - through modeling, simulation, systematic trial and error, or other methods - that you've evaluated alternatives for achieving the desired result.

FREQUENTLY ASKED QUESTIONS

WHAT DOES THE R&D TAX CREDIT DO?

Research and Development (R&D) is a unique tax credit. It helps to reduce current and future years of state and federal tax liabilities. It is a dollar-for-dollar offset for both state and federal income taxes. The credit offers an instance source of cash for the small to mid-cap businesses. Businesses can apply the credit for all open tax years and the current year.

WHAT INDUSTRIES QUALIFY FOR THE CREDIT?

Many industries qualify for the credit, including:

  1. Engineering (Aerospace, Architecture, Defense Contracting, Engineering, and Telecommunications).

  2. Environmental & Life Sciences (Agriculture/Farming, Medical Devices, Pharmaceuticals, Recycling, and Waste

    Management).

  3. Manufacturing & Design (Apparel/Textiles, Brewing, Consumer Foods & Beverages, Distillery,

    Foundry/Metal/Mining, etc.).

  4. Software (Internet Applications, IT/Software Development, Startups and Website Advertising/Marketing).

FREQUENTLY ASKED QUESTIONS

from perspective clients

WHY DOES THE GOVERNMENT OFFER THE R&D TAX CREDIT?

The intent of the credit is to encourage companies within the U.S. to keep technical talent within the country while simultaneously continuing to drive innovation. This keeps not only your company, but the country, competitive both domestically and internationally.

I DON'T THINK MY COMPANY INVENTS ANYTHING, CAN I STILL QUALIFY?

With the changes throughout the years to the qualification rules, more companies than ever before can now take advantage of the R&D Tax Credit. Essentially, the credit is designed to be a driver of innovation and improvement of processes. R&D Tax Credit eligibility is much broader than many companies realize, applying to not only the development of products, but also activities and operations, such as new manufacturing processes, environmental improvements, software development, and quality enhancements.

IS AN R&D TAX CREDIT STUDY WORTH MY TIME?

Absolutely! Since the changes in legislation and tax reform, the R&D Tax Credit remains one of the most valuable incentives offered by the U.S. government for businesses to remain competitive. It’s essentially free money that you’re entitled to.

I HAVE A CPA, WHY HAVEN’T I HEARD OF THIS?

Even though the credit has been around since 1981, the credit had gradually evolved over the years, with many companies not even able to take advantage of the incentive until the changes that were made in 2015. Due to its gradual evolution over the years, many CPAs may not be up-to-date on the most recent policies and regulations regarding the credit. We currently partner with CPA firms throughout California, as well as several other states, to assist them in providing this service for their clients.

Interested in finding out if your company may qualify?

We would be happy to do a complimentary feasibility study for you.