The Research & Development Tax Credit, also referred to as the Research & Experimentation Tax Credit (“R&D Credit”), is a tax credit under IRS code section 41, which provides companies a tax incentive to create or improve products, processes or software in the United States. The R&D Credit is a government sponsored benefit that provides cash incentives for companies in industries of all sizes to conduct their Research and Development activities in the United States and over 40 states.
What activities may qualify for the credit?
Taxpayers developing new or improved products, processes or computer software in the United States may potentially qualify for the R&D Credit.
How do I qualify for the R&D Credit?
In order to qualify for the R&D Credit companies must conduct activities that meet the 4 part test defined in IRS Code Section 41:
R&D Credit Four Part Test
- Permitted Purpose: Activity must create new or improved function, performance, reliability or quality of a business component. Business component is defined as a new or improved product, process, or computer software.
- Process of Experimentation: Taxpayers must undergo a process to evaluate one or more alternatives to achieve a result. The result must be uncertain at the beginning of the taxpayer’s research activities.
- Technological in Nature: Activity must be technological in nature and rely on physical or biological sciences, engineering, or computer sciences.
- Elimination of Uncertainty: Activity must intend to eliminate technical uncertainty for the development or improvement of a product, process or computer software. Uncertainty exists if the information available to the taxpayer does not establish the capability or method of development or improvement, or the appropriate design of the product, process or computer software.
How can the R&D credit benefit my company?
The R&D Credit is a dollar for dollar credit against the taxpayer’s federal (and many States’) income taxes. The R&D credit can be a very effective way to reduce the taxpayer’s overall tax liability, fund additional talent acquisition, and improve your bottom line. Also, the R&D credit can be claimed on current and prior year tax returns (typically 3-4 years depending on the taxpayer’s statute of limitations for prior year’s tax returns). Remember, the statute stays open going backwards for all years covered by NOLs.
What if I my company can’t use the R&D credit currently?
The Federal R&D Credit can be carried forward up to 20 years. Each State has their own rules on how long the R&D credit can be carried forward.
Will the Federal R&D Credit expire?
As of December 2015 the R&D Credit is a permanent credit companies can rely upon and use as a tax planning tool to reduce their effective tax rate.