R&D Tax Credit

The R&D tax credit provides an incentive for companies to invest in Research and Development by allowing these companies to claim credits for spending on qualified research expenditures (QREs). Investment in Research and Development (R&D) is central for driving long-term technological change and innovation. The R&D tax credit and the immediate expensing for R&D spending are two ways the Federal Tax Code provides incentives for R&D investment. Qualifying expenditures generally include the design, development or improvement of products, processes, techniques, formulas or software.

Businesses can claim the R&D Credit by identifying qualifying expenses and provide adequate documentation that shows how these costs meet the requirements under Internal Revenue Code Section 41. Financial records, business records, oral testimony and technical documents may be used for this purpose.

How does the R&D tax credit work?

Typically, 8% to 10% of a company’s annual qualifying R&D expenses can be applied, dollar for dollar, against its federal income tax liability. Various activities may qualify for the credit, including but not limited to:

      1. Developing processes, patents, formulas, techniques, prototypes or software improving or redesigning existing products;
      2. Hiring scientists, designers or engineers that are engaged in qualified activities;
      3. Devoting time and resources to creating (manufacturing or developing) new or innovative products;
      4. Developing intellectual property;
      5. Paying certain amounts for salaries, supplies, contract research, and cloud hosting.

Start-up businesses can also claim an R&D tax credit of up to $250,000 per year against their payroll taxes. Eligible organizations include those that have less than $5 million in gross receipts in the current year and no more than 5 years of generating gross receipts, including the current year. These businesses can offset payroll taxes for up to five years, with a maximum of $1.25 million in total credits used on their quarterly Federal payroll tax returns.

If your Company is involved with Research and Development of new products, contact Mark Reese, CPA for more information on how to claim these R&D tax credits.