Credit for Increasing Research Activities (R&D Tax Credit)
| Jurisdiction: | Federal |
| Incentive Type: | Tax Credit |
| Industries: | All |
| Eligible Sector: | LLC’s, C-Corps, S-Corps, Partnerships, Sole Proprietors, Estates, Trusts |
| Category: | Financial Incentive |
| Time Period: | Ongoing |
| 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
- Is the work technological in nature?
- Is there a permitted purpose?
- Is there elimination of uncertainty?
- 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:
| Type | Original Filing Date | Extension Filing Date |
| Corporations (C&S) | 2 ½ months after end of fiscal year | 6 months after the initial filing date |
| LLC’s* | April 15th | October 15th |
| Individuals, Sole Proprietors, Partnerships, Estates and Trusts | April 15th | October 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 Type | Original Filing Date | Extension Filing Date |
| C-Corporations – calendar year | April 15 | 5-month automatic extension (September 15) until 2026, then 6-month |
| C-Corporations – fiscal year other than June 30 | 3 ½ months after year-end | 6-month automatic extension |
| C-Corporations – June 30 year | September 15 (until 2026, then October 15) | 7-month automatic extension (April 15) until 2026, then 6-month |
| Partnerships | March 15 for calendar-year returns, or 2 ½ months after close of year-end | 6-month maximum extension (September 15 for calendar-year returns) |
| S-Corporations | March 15 for calendar-year returns, or 2 ½ months after close of year-end | 6-month maximum extension |
| Trust Form 1041 – calendar year | April 15 | 5 ½ month maximum extension |
| Trust Form 1041- non-calendar year | 3 ½ months after year end | 5-month maximum extension (6-month for certain types of trusts) |
| FinCEN Foreign Bank Account Reporting (FBAR) | April 15 | 6-month maximum extension |
Click here to find out if your state offers additional tax credits for R&D expenditures.
