Research &
Development
Tax Credit
A Valuable Tax Credit that Fosters Innovation
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The Research and Development (R&D) tax credit is a
Federal tax incentive that rewards taxpayers for
increasing investment in U.S.-based research activities.
This credit was first introduced by Congress in 1981 and made permanent on 2015. The R&D tax credit is available to businesses that design, develop, or improve products, processes, techniques, formulas, or software. Correctly calculating and properly documenting the R&D tax credit is critical because it can greatly lower taxes and increase cash flow.
Qualifications
The R&D tax credit is available to taxpayers who incur incremental expenses for Qualified Research Activities (QRAs) conducted within the U.S. While primarily a wage-based credit, the credit is comprised of the following Qualified Research Expenses (QREs):
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Internal wages paid to employees for qualified services; this includes those individuals directly performing the science as well as those individuals directly supporting and supervising these individuals.
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Basic research payments made to qualified educational institutions and various scientific research organizations.
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Contract research expenses (when someone other than an employee of the taxpayer performs a QRA on behalf of the taxpayer, regardless of the success of the research).
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Supplies used and consumed in the R&D process.
Research activities must meet the four part qualification test
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Experimentation must be conducted to eliminate the technological uncertainty. This includes assessing a design through modeling or computational analysis and experimenting with a material’s durability or longevity.
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Technological uncertainty must exist at the outset of the activities. Uncertainty exists if the information available at the outset of the project doesn’t establish the capability or methodology for developing or improving the business component, or the appropriate design of the business component.
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Activities must relate to the development of new or improved functionality, performance, reliability or quality features of a structure or component of a structure, including product or process designs that a firm develops for its clients.
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Activities must rely on a hard science, such as engineering, computer science, biological science or physical science.
