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R&D Tax Credit

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R&D Tax Credit Defined

The federal Credit for Increasing Research Activities (R&D Tax Credit) under Internal Revenue Code (IRC) §41 and 174 was enacted to incentivize businesses to invest in the development of new or improved business components, to create new jobs in the U.S., and to remain competitive in the world marketplace.

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How Much Businesses Can Save?

The federal R&D credit rate is 20% (14% for Alternative Simplified Credit calculations) of qualified research and development expenses. Additionally, most states have incentives for research and development activities that can increase benefits for research expenditures.

Many states offer their own R&D tax credits in addition to the federal program, with credit rates typically ranging from 3% to 15% of qualified research expenses. These state-level incentives vary by location and can significantly increase your total benefit when R&D is performed within specific states.

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How Does R&D Tax Credit Work?

Research and development activities encompass more than just work performed in a laboratory or research associated with new-to-the-world discoveries and products. The government rewards technical approaches to problem-solving for which the solution doesn’t need to be ground-breaking or novel in the industry, just new to the company.

The IRS definition of “research” is much broader and must only satisfy the IRS’ four-part test. To qualify, the IRS says the activity must:

  • Resolve technological uncertainty
  • Fundamentally relate to science
  • Relate to a new or improved business component
  • Constitute a process of experimentation
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When to Claim the Credit

The R&D credit can be claimed for all open tax years. Generally, there is a 3-year statute of limitations for federal purposes, some states have a statute of limitations up to 4 years.

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How to Claim the Credit

Complete Form 6765 “Credit for Increasing Research Activities” on the income tax return. To do so involves substantiating the following:

  • Is your company a qualified small business or a member of a controlled group of corporations?
  • How will you determine the base period for the research credit calculation?
  • Which of your activities fit the definition of qualified research?
  • Have you included interviews with appropriate subject matter experts to describe the qualified activities?
  • Have you captured all qualified wages within the development lifecycle for your industry?
  • Have you accounted for all qualified supply expenses and qualified contractor expenses?

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