What is the Research and Development (R&D) Tax Credit?

The R&D Tax Credit (26 U.S. Code §41), also known as the Research and Experimentation (R&E) tax credit, is a federal benefit that provides companies dollar-for-dollar cash savings for performing activities related to the development, design, or improvement of products, processes, formulas, or software. This credit provides much needed cash to hire additional employees, increase R&D, expand facilities, and more. The credit was enacted in 1981 to stimulate innovation and encourage investment in development in the US. Since then, many states have also passed the R&D Tax Credit. As such, this benefit is available across a wide variety of industries. Some of the common industries that qualify include, but are not limited to:

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Use our calculators for an estimate of state and federal benefits or to determine if you can offset payroll tax using the R&D tax credit. It's easy to use and free. If at any time you have questions, contact us. We are here to help you realize your maximum tax benefit.

What are the Potential Benefits of the R&D Tax Credit?

There are several benefits to realizing the R&D tax credit. These benefits can include the following:

  • Receive up to 12-16 cents of federal and state R&D tax credits for every qualified dollar
  • Create a dollar-for-dollar reduction in your federal and state income tax liability
  • Increase earnings-per-share
  • Reduce your effective tax rate
  • Improve cash flow
  • Carry forward the credit up to 20 years
  • Perform look back studies to recognize unclaimed credits for open tax years (generally 3 or 4 years)
  • Utilize the federal R&D tax credit against payroll tax (applicable to certain startup companies)

Four-Part Test

Qualified research activities are defined by the four-part test outlined below

Technological in Nature

Activities must fundamentally rely on the principles of physical or biological science, engineering, or computer science. 

Permitted Purpose

Activities must be performed in an attempt to improve the functionality, performance, reliability, or quality of a new or existing business component.

Eliminate Uncertainty

Activities intended to discover information that could eliminate technical uncertainty concerning the development or improvement of a product. 

Experimentation

All of the activities must include a process of experimentation including testing, modeling, simulating, systematic trial and error. 

Research and Development Tax Insights

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