Menu
USA
CAN
USA
CAN
Menu
Finance your R&D efforts through the R&D Tax Credits program. Learn more about what is R&D tax credit, its eligibility requirements, and what this tax incentive has to offer.
Get your 30-minute NO OBLIGATION consultation.
Innovation is what drives economic growth as well as global competitiveness for businesses. To encourage an entirely new level of innovation, the federal government constituted a research tax credit in 1981 named the R&D Tax Credit program. The research & development tax credit is the primary source for rewarding businesses that invest in research. So what is r&d tax credit, really?
There are three main components to tax credits. The Federal R&D tax credit is available as a Regular or Alternative Simplified credit, the Energy Research Credit, and the University Basic Research Credit. The Federal R&D tax credit is open to any company aiming to improve their products, processes, techniques, formulas, inventions, and software or ultimately develop brand new ones through the regular or alternative simplified credit. The credit gives businesses opportunities to increase their research. Businesses can reach new heights and access brand-new funding sources.
Businesses of any size, in any industry are eligible to apply if they fit
into any of the following categories:
Research that is technological in nature for products or services can qualify R&D Tax Credit expenses. There is a guideline to defining these expenses. The guidelines showcase how the R&D tax credit works through the four-part test. To be considered a scientific research and experimental development activity, your qualified research expenditures (QREs) must meet all four requirements:
The primary State-specific source for rewarding businesses for investment in research
The business must have faced and attempted to eliminate technological uncertainty during the designing or development of the component.
Substantially, the activities are experimental and conducted for a permitted purpose.
The activities should rely on principles of hard sciences, such as engineering, physics, computer sciences, etc
The benefits of the R&D Tax Credit come mainly from reducing a company’s tax liability and accessing a brand-new funding source. Spending on R&D can lower your federal and state income tax liability dollar fordollar. Unused R&D Tax Credits can also be carried forward up to 20 years and back one year. Businesses can claim both Federal and state credit. State R&D credits have their own rules, and carryover rules may vary
from state to state.
Calculated by applying the fixed-base percentage to the average gross receipts of the previous four years
Fixed-base percentage: Entity’s historical percentage of gross receipts spent on QREs
The fixed base percentage is limited to a maximum of 16% The base amount has to be greater than half of the current year’s QREs
Usually, 6% to 8% of your business’ R&D expenses can be applied dollar-for-dollar against your federal income tax liability. Under the R&D Tax Credit, certain qualifying expenses can be claimed, including:
The methods used for R&D Tax Credit calculations are
Regular Research Credit (RRC):
Alternative Simplified Credit (ASC)
Companies can claim the credit for current and up to 3 prior tax years, meaning they can benefit from documenting their R&D activities, ensuring that they can claim their credits when necessary. Documenting these activities makes the business’ life easier when applying for R&D tax credits, but tracking your scientific research and experimental development can help prepare you for the future. Proper documentation of R&D work is necessary for a successful claim. Failure to provide proof will lead to a failed claim. Some examples of appropriate documentation:
To claim the R&D tax credit, completing the R&D tax credit form given by the IRS, Form 6765, Credit for Increasing Research Activities is necessary.
The document has four main sections:
The IRS recommends that businesses calculate their credit using regular credit and simplified credit methods to maximize their tax benefit. If you already what is r&d tax credit, you can read more on how to fill up the forms properly when you apply:
How to fill out form 6575
How to fill out form 8974
15th day of the 3rd month after the Fiscal Year End
Can request a 6-month extension by submitting a form to the IRS
15th day of the 4th month after the Fiscal Year End
Can request an extension by submitting a form to the IRS – varies by FYE
Search your state to learn more about what the State R&D Tax Credits program has to offer
We are there for every step of the claim process, from preparation to audit defence to maximize your claim’s chance for success.
Get the latest news on American grants and incentives straight to your inbox. You can unsubscirbe at any time.
