Research and Development Tax Credits

There has always been a line in the sand when it comes to taxes for individuals and taxes for businesses and corporations.  As you might expect, businesses and corporations are entitled to many tax breaks that individuals aren’t eligible for. One such tax break is the research and development tax credit.

What Is The R&D Credit? 

The Research & Development Tax Credit is a credit granted to companies that oversee research and development in the United States.  This tax credit was first implemented in 1981 as a two-year incentive to reward companies conducting business in the U.S. for innovation during an ongoing recession.  After the initial two-year period, the tax incentive stayed in the tax code for good. Unlike some business tax credits, r&d tax credits are not exclusive to large corporations as businesses of all sizes can qualify for this credit.

How Is The R&D Credit Calculated?

Research and development tax credits are calculated on a complex formula which is unique to each taxpaying business.  Roughly speaking, the formula consists of an incremental credit that is equal to 20% of the QRE (Qualified Restoration Expenditures) for a tax year that exceeds a threshold.  The threshold is determined by an average of the four previous tax years percentage of gross receipts spent on QRE’s.

Who Qualifies for the Tax Credits?

Qualification for r&d tax credits are based upon the money that a business spends on improving, updating, or developing their products.  Loosely speaking, any business that conducts any product developing, updating, designing, or enhancements will qualify for research and development tax credits.

What Expenditures Qualify for the Credit?

Expenditures that cover virtually any sector of research and development qualify for the tax credit.  This includes expenditures such as payroll expenses to an employee who conducts research for the product.  This also covers out-of-work expenses to facilitate employee research. Expenses related to research are also qualifying expenditures, this covers events such as hiring a consultant to conduct research and development for the company, subcontractors, and the use of test laboratories all under the auspices of research and development.  Consumable goods in relation to research and development work also fall under qualifying expenditures. 

Final Thoughts

The research and development tax credit is a wonderful way to reward businesses large and small for being innovative and providing goods and services to the economy.  Businesses should look into this credit if they conduct any form of development and research into new products and updates to their product line. Again, the business doesn’t have to be a gigantic conglomerate to qualify for the tax credit.  Keep track of all expenditures and notate the money spent on research and development to take full advantage of this tax incentive through our professional tax prep services at MB Group LLC. Call today to discuss with our team!