The research and development tax credit was founded in 1981 as part of the Economic Recovery Tax Act to help companies remain competitive. Recognized as a permanent tax credit as of January 1, 2016, companies can apply for one of the most valuable tax solutions, research and development tax credits – providing a dollar-for-dollar reduction in tax liability. Businesses are able to hire more engineers, scientists and software developers with the tax savings they gain from this credit. Additionally, the credit allows companies to buy more supplies and materials.
Qualified Research Activities
Most companies that manufacture products in the United States conduct qualified research activities that may be offset by R&D credits. Of the more than $10.8 billion in research and development credits claimed in 2012, nearly $6.6 billion went towards manufacturers.
If your business invests time and resources in research activities, you may qualify to claim the R&D credit. Creating or improving a product, formula, process, invention, technique or software application is usually considered an eligible expense. The following activities are examples of research that qualifies your business to claim the R&D credit:
- Testing new materials and concepts
- Developing or applying for patents
- Adding equipment that improves a process
- Researching product and material alternatives
- Developing new manufacturing processes
- Participating in technical meetings
Making The R&D Tax Credit Permanent
Research and development tax credits have worked well in recent years to encourage businesses to pursue research activities. Studies show that a 10% decrease in the price of R&D activities leads to a more than 10% increase in R&D spending.
In the past, the R&D credit was allowed to lapse and was not put into place retroactively. Businesses did not receive tax credits they expected to earn for research spending between June 1995 and June 1996, for example. This loss of tax savings negatively impacted many businesses’ budgets. Fortunately, the R&D credit has been renewed or applied retroactively since 1996.
Since the credit is now permanent, businesses gain these additional benefits:
- Companies can quantify the value of R&D tax incentives and complete their long-term budgeting with confidence because financial statements and quarterly estimated taxes now reflect the R&D tax credit as well.
- Start-up businesses can now qualify to reduce their payroll taxes as long as gross receipts are less than 5 million dollars.
Consult A Tax Expert
The pursuit of research and development tax credits significantly improves your budget when you work with tax experts knowledgeable in R&D tax rules. Your tax consultant is aware of when the R&D credit must be renewed and is experienced in submitting the proper documentation according to IRS timelines.
Receive guidance as you fund your business’s future through the R&D credit by speaking with a tax expert. A tax expert at CTI is available to answer your questions about claiming this valuable credit and implementing other tax solutions.
Ready to learn more about claiming research and development tax credits? Discover tips from tax experts on how to make R&D credits work for your business.
