The Research and Development Tax Credit is a government-sponsored benefit that provides cash incentives for companies conducting R&D in the U.S. It is a credit, which is a dollar-for-dollar credit against taxes owed or paid. As a result, a company must have had past net income or plan to have net income in the future to gain benefit from the credit. Any company that designs, develops, or improves products, processes, techniques, formulas, inventions, or software may be eligible. Even if a company has simply invested time, money and resources toward the advancement or improvement of their products and processes, they may also qualify.
For example, if a company is involved in any of the following activities, they may be able to claim the R&D tax credit:
- Developing an innovative product that is new to the market
- Engineering and designing a new product
- Research aimed at discovering new knowledge
- Searching for ways to apply new research findings
- Designing product alternatives
- Evaluating product alternatives
- Significant modifications to the concept or design of a product
- Designing, constructing, and testing preproduction prototypes and models
- Engineering activity to advance the product’s design to the point of manufacture
- Systems processing modeling
- System and functional requirements analysis
- Integration analysis
- Experimenting with new technologies
- Experimenting with new material and integrating the material to improve manufactured products
- Engineering to evaluate new or improved specification/modifications in terms of performance, reliability, quality, and durability
- Developing new production processes during prototyping and preproduction phases
- Research aimed to significantly cut a product’s time-to-market
- Research aimed to obtain more efficient designs
- Developing and modifying research methods / formulations / products
- Paying outside consultants / contractors to do any of the above activities
The credit rules allows companies to go back for all open tax years (usually three years) and amend returns for any credits applicable to those years that were never claimed. The credits can generally be carried forward 20 years.
An R&D study must generally be performed to determine and document a company’s activities that qualify. From this information, the credit(s) can be calculated.
A first step to get started involves performing an analysis to determine the cost vs. benefit to the company of determining the R&D credit. In other words, will there be enough benefits in credits from the company’s activities and will they be usable, that will outweigh any costs for an R&D study and amending the prior tax returns, etc. This may at first seem arduous, but the process generally may yield significant benefit to the company.
If it sounds like your company may have these activities, we would love to help. We can move forward in discussing what we can do for you! Get in touch.