The R&D Tax Credit is not refundable. If you don’t owe income tax or the credit is worth more than what you owe, you won’t receive a check from the IRS.
Most businesses will use the 20-year carryforward to apply their unused credit to future years’ taxes. Eligible small businesses can also opt to apply the credit towards their payroll taxes.
The Research and Development Tax Credit (R&D) is a tax credit for businesses of all sizes who conduct R&D in the United States. The R&D Tax Credit can be extended to a wide range of business and industries that exceeds far beyond scientists and research labs.
It was created to provide a tax incentive for U.S. companies to increase spending on research and development in the U.S. Each year more and more companies take advantage of the R&D Tax Credit . Additionally, in 2015, the Protecting Americans from Tax Hikes (PATH) Act, made the R&D Tax Credits permanent, while also extending the benefit to startups.
The activities that qualify for the R&D tax credit are the same ones driving growth in your business.
- Creating improved products, processes, formulas, software, and techniques
- Automating or improving internal manufacturing processes
- Designing tools, jigs, fixtures, and molds
- Integrating new equipment
- Development of data center, big data, and data mining tools
- Integration of APIs and other technologies
- Development of financial or pricing models
- Hiring outside consultants to perform any of the listed activities
- Manufacturing new or improved products
- Developing prototypes, first articles, models
- Evaluation of alternative materials
- Development of firmware
- Network hardware and software development and optimization
- Developing simulators
- Development of risk management systems
Ensuring that you understand the rules for qualification is an essential first step in claiming the R&D Tax Credit. This is normally done during a feasibility analysis, also referred to as Phase 1. R&D activities are explored and identified at a high level along with related qualified research expenses (QREs). This information is then used to estimate your federal and state R&D Tax Credit. Education is key and provides the ability to identify qualified activities and QREs so a more accurate benefit estimate can be determined.
The expenses that qualify for research activities within your company typically include employee compensation, materials, and contracted services. Various forms of documentation are sufficient to support your qualified expenses and may include payroll records, financial records showing supply or contract research expenses, and vendor invoices.
On average, companies are typically able to claim 7-10% of their qualified expenses as a federal R&D Tax Credit. For example, a single software developer, engineer, or lab technician who receives a W2 of $100,000 a year may generate a tax savings of up to $10,000.
