By Debbie Gregory.

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Governments typically incentivize private industry to produce research and development (R&D) as a strategic tool to advance their economies. The United States government also does so. The  Research & Experimentation Tax Credit (R&D Tax Credit) was first introduced in 1981 as a two-year incentive, and has remained part of the tax code ever since.

The rules of the Research & Development Tax Credit can be found under Internal Revenue Code (IRC) section 41 and the related regulations. The R&D tax credit may apply to any taxpayer that incurs expenses for performing Qualified Research Activities (QRA) on American soil.

It’s not only high-tech or life sciences companies with dedicated research departments that qualify for the R&D tax credit. Some other common industries that qualify include, but are not limited to:

  • Aerospace & Defense
  • Architecture
  • Automobile
  • Chemical & Formula
  • Engineering
  • Environmental
  • Food Science
  • Foundries
  • Life Sciences & Pharmaceutical
  • Machining
  • Manufacturing & Fabrication
  • Software Development
  • Tool & Die Casting

To qualify, you must be able to prove that the activities rely on are hard science, such as engineering, computer science, biological science, or physical science;  that they relate to the development of a new or improved business component; and that your activities constitute a process of experimentation involving testing and evaluation of alternatives to eliminate technological uncertainty.

The potential R&D credit benefits include a dollar-for-dollar reduction in your federal and state income tax liability; improved cash flow; look back studies that recognize unclaimed credits for open tax years(generally for three or four years); and up to 13.5 cents of R&D tax credit for every qualified dollar spent.

Whether you’ve already filed your return or filed an extension, the R&D credit is a powerful tool to help lower your tax rates. If you are uncertain as to whether you qualify for the R&D tax credit, there are numerous professionals that can guide you through the process.

 

Veteran and Military Business Owners Association, VAMBOA.