What is the 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. 

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:

• 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 companies)

How do I know if I qualify for a R&D Credit? 

R&D doesn’t have to be all complex science. In fact, it is the opposite! One of the most commonly misinterpreted tax credits is the R&D credit. Most people believe that in order for a company to qualify for the credit, they must work on the cutting edge of technology – but this couldn’t be further from the truth.

Companies qualify for this credit if they are engaged in activities relating to any of the following:

• developing or refining a product or software
• testing a product or software
• improving processes on product
• technical designs
• documenting results of tests
• setting up more efficient & environmentally friendly designs
• compiling research data