The Research and Development (R&D) Tax Credit remains one of the best opportunities for businesses to substantially reduce their tax liability. For what amounts to their daily activities, companies from a wide-range of industries can qualify for federal and state tax savings high to enough to allow companies to hire new employees, invest in new products and service lines, and grow their operations.
Now, due to numerous modifications and expansions over the years, more companies than ever before can benefit from this valuable incentive.
What is the R&D Tax Credit?
The Research and Development Tax Credit is a government-sponsored tax incentive that rewards companies for conducting R&D in the United States. The credit was implemented to incentivize innovation throughout the economy and to keep technical jobs here in the U.S.
However, what constitutes R&D with regard to the credit is much more expansive than business owners realize, with activities related to applied sciences and other technical projects qualifying companies from numerous industries.
The R&D Tax Credit is for businesses of all sizes, not just major corporations with research labs – and many companies are eligible, with an expansive list of activities qualifying for the credit.
What Qualifies for the R&D Tax Credit?
If your company does any of the following, your business likely qualifies for the R&D Tax Credit:
Develops or designs new products or processes
Enhances existing products or processes
Develops or improves upon existing prototypes and software
How do I claim the R&D Tax Credit?
A number of factors go into claiming the credit, but the potential savings on the table make exploring the credit a worthy investment. Since the credit may be claimed for both current and prior tax years, companies can benefit from documenting their R&D activities to ensure they are positioned to claim the credit in both situations.
To claim the credit, the taxpayer must contemporaneously evaluate and document their research activities to establish the amount of qualified research expenses paid for each qualified research activity. While taxpayers may estimate some research expenses, they must have a factual basis for the assumptions used to create the estimates.