The Research & Development Tax Credit
The federal R&D Tax Credit is a general business tax credit for companies that incur R&D expenses in the United States. The tax credit, which was originally introduced in 1981, is intended to incentivize companies to develop new and improved products and processes. In addition to the federal tax credit, about 40 states have their own R&D tax credit initiative.
Who Qualifies?
Eligible companies include:
- Manufacturing (almost any sector)
- Engineering (mechanical, electrical, civil)
- Agriculture (field, greenhouse, irrigation)
- Food and Beverage Production
- Printing and Publishing
- Software Developers
To qualify for the research tax credit, businesses must have:
- Developed products or processes that have been developed using specific know-how that is treated as a trade secret or is patentable.
- Developed a new or improved product that advances the state of the art, and required one or more redesigns, simulations, mock-ups and/or experimental trials to achieve.
- Developed or incorporated a new technology in order to catch up to a competitor.
- Attempted to develop a product or process improvement but it was eventually abandoned. (A project does not have to be successful to be eligible).
- Incurred costs in any of the following:
- Development of new equipment
- Prototype products
- Production tooling
- Material consumed during testing
- Sample parts to refine a process
- Consultants or subcontractors
- Contracted test labs (e.g. UL, NEMA, FCC)
Companies that would likely benefit:
- Gross sales that are greater than $10 million
- Paid an average of at least $20K in taxes in the past 3 years
- Zero or expiring Net Operating Losses (NOLs)
- Not in an Alternative Minimum Tax (AMT) situation
Federal and state tax credits can amount to as much as 20% of the costs incurred in developing new products and manufacturing processes, or improving exisiting products and processes.
Eligible R&D Activities:
There are three types of R&D situations supported by the R&D tax credit program. They are classified as follows:
- Classic R&D: resulting from a deliberate decision to develop a new or improved product or process;
- Contingent R&D: planned to be contingent on receiving an order, where the bid was made knowing that existing technology is insufficient to fill the order
without some development effort; - Unplanned R&D: arising from the sudden discovery, part way through filling an order, that existing technology is inadequate and must be advanced by an emergency development effort to complete the order.