Who Can Benefit From The Research & Development Credit?

The Research and Development Tax Credit is available to companies that invest in the development of new or improved products, manufacturing processes, and software. The Credit was initiated by Congress in 1981 as an incentive to American businesses to increase innovation. Qualification for the Credit depends on the nature of the activities performed by a company and the expenditures incurred for those activities.

Case Study

Following is a case study that presents a fictitious company in the food service industry, some of whose activities qualify for the credit. In the current tax year, Green, Inc. undertook an effort to develop a new line of cookware using a new material that works like normal cookware and is biodegradable, so it causes no pollution when disposed of at the end of its useful life. Green, Inc. incurs the following costs in the development activities:

Qualifying Activities

  • Activities must involve the development of new or improved products, processes, or software
  • There must be uncertainty as to the design of the new product, process, or software
  • Testing alternative methods in an attempt to achieve the desired result
  • The activities must be technological in nature, making use of the principles of the physical sciences

Qualifying Costs Associated With The Above Activities Include:

  • Wages subject to income tax withholding paid to employees to perform qualified activities
  • 65% of amounts paid to non-employees to perform qualified activities (contract research)
  • Supplies (non-depreciable property) used to build prototypes and other tangible items used in the development process

r&d case study

KBKG Results

The calculation of the Credit requires several other attributes not included in this case study. However, in this case study, the current year federal credit for Green, Inc. could be up to $30,000.

KBKG is a national firm specializing in R&D Tax Credits, Cost Segregation, Enterprise Zone Tax Credits, and Energy Efficient Commercial Building Deductions. Our engineers and tax experts have performed thousands of tax projects resulting in hundreds of millions of dollars in benefits for our clients since 1999. As leading educators in our field, we have been invited to speak to thousands of CPAs and Tax Professionals by some of the most prominent associations in the industry. Our goal is to bring value to our clients by providing quality service, building long-term relationships, and ensuring a high standard of professional ethics.

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