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 R&D tax 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.

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.

Many industries qualify for the credit, including:

  • Engineering (Aerospace, Architecture, Defense Contracting, Engineering, and Telecommunications).
  • Environmental & Life Sciences (Agriculture/Farming, Medical Devices, Pharmaceuticals, Recycling, and Waste Management).
  • Manufacturing & Design (Apparel/Textiles, Brewing, Consumer Foods & Beverages, Distillery, Foundry/Metal/Mining, etc.).
  • Software (Internet Applications, IT/Software Development, Startups and Website Advertising/Marketing).
  • Many others that do the required activities

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

I HAVE A CPA, WHY HAVEN’T I HEARD OF THIS?
Even though the credit has been around since 1981, the credit has 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 partner with CPA firms throughout the United States, to assist them in providing this service for their clients

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