Research and Development Tax Credits
If your company has spent time and resources developing new or improved products and processes, you may qualify for the research and development (R&D) tax credit. R&D Tax Credits offer a significant tax advantage, but businesses often do not utilize them simply because they don't understand them or they mistakenly believe they are ineligible to claim them.
The R&D Tax Credit is a dollar for dollar reduction of a taxpayer’s federal income taxes. In many cases an R&D Credit can even reduce state taxes depending on whether or not a particular state’s laws allow taxpayers to take advantage of the credit. Many states do; however, the computation usually varies from state to state.
The R&D Tax Credit allows qualifying businesses to recoup a portion of their expenses related to business improvement and production development. Companies can also claim credits from prior years and request a refund of the taxes paid. The credit is meant to encourage businesses located in the United States to keep jobs in the states. It is also meant to encourage research and development.
Who Qualifies for the R&D Credit?
Many businesses are surprised to learn that this credit is intended for both formal R&D programs carried out in a laboratory as well as for experimental development work that can occur on the shop floor. In particular, the credit can be earned during the technical struggles leading up to shipment of a new or improved product, or before a new process becomes commercially viable.
The R&D Tax Credit is intended for all technically aggressive firms, regardless of product. R&D credits can be obtained by industries other than those generally considered “High Tech”. The belief that a business needs to be high-tech in order to reap the benefits of the R&D Credit can cost taxpayers many thousands of tax dollars.
Additional companies that qualify include:
- Machine Shops
- Food Sciences/ Manufacturers
- Software Developers
- Tool & Die
- Other Qualified Businesses
What Activities Qualify for the R&D Credit?
- Developing new improved or more reliable products, processes or formulas
- Developing patents
- Conducting testing and developing prototypes, models, or samples
- Performance testing
- Developing new technology
- Experimenting with the use of new materials and compounds
- Upgrading systems or software
- And many others