R&D Tax Credit: FAQs
What is the R&D Tax Credit?
A tax incentive for performing qualified research (not necessarily successful) in the U.S., resulting in a credit to a tax return.
What is the impact of the R&D tax credit?
The credits are “post-tax tables.” Therefore, R&D credits result in a dollar-for-dollar tax benefit.
Who is eligible?
Anyone who satisfies the IRS’ 4-part test and substantiates and documents their qualifying research expenses (QRE’s).
What is the IRS’ 4-Part Test?
- Technological in nature: Mathematics, Engineering, Computer science, Earth/natural sciences
- Improved functionality: Performance (speed), Reliability (capacity), Quality, Cost reduction
- Eliminate uncertainty: Capability uncertainty (“Can we do it?”), Methodology uncertainty (“How do we do it?”), Product design (“What is the correct formula?”)
- Process of experimentation: Evaluating alternatives, trial & error, scaling-models, testing results, analyze & form new hypothesis
What are Qualifying Research Expenses?
Those operating expenses of a taxpayer that form the basis of the R&D credit, which are made up of payroll, supplies and contracted research services.
Are there any industry or business organization limitations of who can claim the credit?
No, fortunately any company, large or small, from corporations to sole proprietorships in any industry can qualify for the credit.
Does my R&D project have to be successful?
No, your R&D project does not have to be successful to be eligible for the credit. By definition, much R&D will be trial-and-error and prone to failure. The intent must be genuine though and not form a pattern of manipulating data.
Is there a limit on how many QRE’s I can claim?
No, there is no limit amount of qualifying expenses you can claim.
Can the credits be carried forward or carried back?
Yes, credits can be carried forward 20 years and back one year.
Can I claim the R&D credit for amended returns?
Yes, amended returns for up to three years back can yield additional credits.
Is there a way to maximize my credit?
Federal returns allow an additional 20% (net of calculations) credit for R&D conducted through universities. Some states offer additional credits for this well. Find out if your state is one of them.
Documentation is another way to maximize your credit. The more QRE’s that are substantiated, the more you can claim.
