What is the Research and Development (R&D) Tax Credit?
The R&D Tax Credit is a federal incentive that allows companies to reduce income tax liability for performing activities related to the development, design, or improvement of products, processes, formulas, or software. Over 65 industries are eligible to claim the Research and Development Tax Credit by creating a new or improved product, process or technique.
This credit provides much needed cash to hire additional employees, increase R&D expenses, expand facilities, and more. The credit was enacted in 1981 to stimulate innovation and encourage investment in development in the US. Since then, many states have also states have implemented their own version of the R&D Tax Credit, and qualifying businesses can claim both!
What are the Potential Benefits of the R&D Tax Credit?
There are several benefits to realizing the R&D tax credit. These benefits can include the following:
- Immediate reduction in your federal and state income tax liability
- Reduce your effective tax rate
- Carry forward the credit up to 20 years
- Increase business net earnings
- Increased business valuation
- Improve business cash flow
- Allowed to perform look back studies to recognize unclaimed credits for open tax years (generally 3 or 4 years)
How to Determine if Your Business Qualify for R&D Tax Credit?
An activity that meets the 4-part test is a qualifying research activity and can potentially qualify for claiming R&D Tax Credit.
- Technological in Nature – activities must fundamentally rely on the principles of physical or biological science, engineering, or computer science.
- Permitted Purpose – activities must be performed in an attempt to improve the functionality, performance, reliability, or quality of a new or existing business component.
- Eliminate Uncertainty – activities intended to discover information that could eliminate technical uncertainty concerning the development or improvement of a product.
- Experimentation – all of the activities must include a process of experimentation including testing, modeling, simulating, systematic trial and error.
Talk to Our R&D Tax Credit Experts
Did you know that your business could qualify for the R&D Tax Credit? Discover how this federal incentive can reduce your tax liability, increase your business valuation, and free up cash for your operations. Call our tax credit experts at (563) 552-7180 and they will perform a free preliminary analysis that can give you an idea of how the R&D Tax Credit can benefit your company.
