Research & Development Tax Credits

Frequently Asked Questions

Find answers to the most commonly asked questions about research and development (R&D) tax credits. If you don’t find the answer you’re looking for, we’re here to connect with you directly.

What are R&D tax credits?
The federal research and development (R&D) tax credit was created by Congress as part of the Economic Recovery Tax Act of 1981. The net credits of the incremental calculation are a dollar-for-dollar offset of tax liability, but typically may not offset the Alternative Minimum Tax. Some states also offer R&D tax credits and other incentives, as do some local jurisdictions, to encourage companies to relocate to their areas.

What types of activities qualify for R&D tax credits? In general, a company may qualify for R&D tax credits if they have invested time, money and resources in activities that contribute to creating or improving a product, process, technique, formula, invention or software application system. The following examples provide a few areas to consider:

  • Conducting research
  • Developing new or improved concepts or hypotheses
  • Developing or designing new products, processes or systems
  • Modifying or redesigning existing , processes or systems
  • Testing new materials and concepts
  • Researching product and material alternatives
  • Developing internal software solutions
  • Designing or evaluating product alternatives
  • Creating new design and/or functional specifications
  • Designing, constructing, testing and evaluating prototypes
  • Reviewing experimental results
  • Developing new manufacturing processes
  • Participating in technical meetings
  • Documenting research activities
  • Compiling research documentation and data
  • Maintaining laboratory equipment
  • Directly supporting or supervising research activities
  • Using outside contractors to conduct research and development activities

What types of expenses qualify for an R&D tax credit?
Expenses that qualify under the federal R&D tax credit regulations include:

  • Wages – The research expenditure is only eligible if the wage is paid to the employee for performing a qualified service.
  • Supplies – Supplies are any tangible property other than land or land improvements, and not property subject to depreciation. Supply expenses must be directly linked to qualified research activities. Qualified supplies include prototypes and testing materials. The taxpayer may not include travel, shipping or royalty expenses as supply expenses.
  • Contract Research – Contract research may be claimed for payments to third-party contractors that meet the same qualification requirements as for wages. This expenditure requires the taxpayer to have rights into the research results and to take on development risk. The contract research payments are included at 65% of the actual expense.

What documentation is needed to substantiate the R&D tax credit?
Companies must provide contemporaneous documentation that links an employee’s time directly to an R&D project or activity. This documentation takes the form of two methods: project approach and departmental approach. The project approach relies on a taxpayer’s time-tracking documentation to directly link an employee’s hours to a specific qualified R&D project. The departmental approach relies on oral testimony, contemporaneous engineering documentation, job descriptions, educational background and other information to develop a time estimate.

How many years may I go back to claim the R&D tax credit?
If the credit has never been claimed, you may claim the R&D tax credit for all open tax years. Generally, there is a three-year statute of limitations period for federal taxes, but certain circumstances could extend your ability to claim the benefit. At the state level, the statute of limitations is three to four years. Our detailed study and R&D tax credit calculation makes it possible for you to file amended returns/claims for state or federal refunds.

May I claim the R&D tax credit if I do not pay any tax?
The R&D tax credit is not a deduction but an actual dollar-for-dollar credit against taxes owed. If you do not have tax liability in a year the credit is generated, the federal credit may be carried back one year and forward 20 years.

How long does it take CTI to complete a typical R&D tax credit study?
The typical R&D study takes eight to 10 weeks to complete and includes final deliverables and supporting documentation. However, we are able to complete calculations in less time to meet filing deadlines. The table below illustrates our typical process timeline:

Phase One: 1 to 2 weeks (FREE) Phase Two: 8 to 10 weeks Phase Three: Varies
High-Level Feasibility Study R&D Tax Credit Study Audit Support
  • Estimate qualified research activities and expenditures
  • Draft preliminary credit calculations
  • Develop a methodology and detailed work plan for Phase Two
  • Perform a comprehensive, detailed analysis of your company’s R&D activities
  • Quantify qualified research expenditures
  • Create state and federal credit calculations
  • Develop and organize supporting documentation
  • Help companies develop internal processes to secure, maximize, and document their R&D tax credits
  • Help defend R&D tax credit claims during IRS and state taxing authority audits

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