Credit for Increasing Research Activities (R&D Tax Credit)

Incentive Type:Tax Credit
Eligible Sector:
LLC’s, C-Corps, S-Corps, Partnerships, Sole Proprietors, Estates, Trusts
Financial Incentive
Time Period:
Governing Body:IRS
What’s it worth?:6% – 14% of QRE (Qualifying Research Expenses)

The Research & Experimentation Tax Credit, most frequently known as the R&D Tax Credit, is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States. The credits are a tax incentive for performing qualified research in the United States, resulting in a credit to a tax return.

For the first three years of R&D claims, 6% of the total qualified research expenses (QRE) form the gross credit. In the 4th year of claims and beyond, a base amount is calculated, and an adjusted expense line is multiplied times 14%. Federal returns allow an additional 20% credit to those who conducted their R&D activities through a University. Qualifying Research Expenses consist of:

  • Payroll
  • Supplies
  • Contracted Research Services

The credit was established as part of the Economic Recovery Tax Act of 1981. It was intended to act as an economic stimulus that would encourage investment within the United States. All industries and most types of businesses can qualify for the R&D tax credit if they can satisfy the 4-Part Test.

IRS’ 4-Part Test

  1. Is the work technological in nature?
  2. Is there a permitted purpose?
  3. Is there elimination of uncertainty?
  4. Is there a process of experimentation?

Exclusions include:

  • Research conducted after the beginning of commercial production, i.e., “normal production”
  • Adaptation-duplication of existing business components;
  • Reverse Engineering, i.e., claiming someone else’s R&D
  • Surveys, studies, activity relating to management function/technique, market research, routine data collection, QC or testing
  • Foreign research conducted outside the United States
  • Research related to social sciences, arts, or humanities
  • Travel, meals or entertainment
  • Telephone expenses of researchers
  • Relocation or rental/lease expense
  • Professional dues or royalty/licenses

Filing Dates for tax years prior to December 31, 2015:

TypeOriginal Filing DateExtension Filing Date
Corporations (C&S)2 ½ months after end of fiscal year6 months after the initial filing date
LLC’s*April 15thOctober 15th
Individuals, Sole Proprietors, Partnerships, Estates and TrustsApril 15thOctober 15th

*LLC’s can elect to change their fiscal year and be treated like a corporation for tax purposes.

Filing Dates effective for tax years beginning after December 31, 2015:

Company TypeOriginal Filing DateExtension Filing Date
C-Corporations – calendar yearApril 155-month automatic extension (September 15) until 2026, then 6-month
C-Corporations – fiscal year other than June 303 ½ months after year-end6-month automatic extension
C-Corporations – June 30 yearSeptember 15 (until 2026, then October 15)7-month automatic extension (April 15) until 2026, then 6-month
PartnershipsMarch 15 for calendar-year returns, or 2 ½ months after close of year-end6-month maximum extension (September 15 for calendar-year returns)
S-CorporationsMarch 15 for calendar-year returns, or 2 ½ months after close of year-end6-month maximum extension
Trust Form 1041 – calendar yearApril 155 ½ month maximum extension
Trust Form 1041- non-calendar year3 ½ months after year end5-month maximum extension (6-month for certain types of trusts)
FinCEN Foreign Bank Account Reporting (FBAR)April 156-month maximum extension

Click here to find out if your state offers additional tax credits for R&D expenditures.