The Permanence of the R&D Tax Credit

The Permanence of the R&D Tax Credit

Posted by Shaun Yeh, Esquire on 10.25.19

Research and development is a critically important aspect of every industry’s current and future growth. The research and development (R&D) tax credit provides motivation for companies to advance innovation in the United States. The R&D tax credit is accessible to companies that develop new products or processes and companies that make improvements to existing products or processes. Businesses conducting R&D activities may qualify for and benefit from R&D tax credits, and they can now have confidence when applying for the credit due to the Protecting Americans from Tax Hikes (PATH) Act signed into law in December 2015 that permanently extended the federal R&D tax credit. Companies that qualify can claim employee wages, supplies and contract research costs associated with R&D projects.

Congress first introduced the R&D tax credit back in 1981 as a temporary credit which was set to expire in 1985. The R&D credit, as a temporary credit, had been allowed to expire multiple times and went through numerous extensions in one to two year increments until the PATH Act finally made it permanent. Before the PATH Act made the federal R&D tax credit permanent, the uncertainty limited the overall effectiveness of the R&D credit by making it difficult for businesses to even consider the credit in any important long-range planning for R&D investments.

The R&D Tax Credit Made Permanent 

The PATH Act eliminated the uncertainty surrounding the availability of the R&D credit by making it permanent. With a permanent R&D credit, taxpayers can more effectively plan and commit to long-term investments in their R&D and innovation. Small start-ups and medium sized businesses are now claiming the credit, enabling them to put funds back into their businesses to improve products or processes that they otherwise would not have. This is leading to a more competitive global outlook and conclusively a much stronger U.S. economy.

This PATH Act included the following important changes to the R&D credit:

  • Made the federal R&D tax credit permanent
  • Allows businesses with less than $50 million in gross receipts to offset the R&D credit against alternative minimum tax (AMT)
  • Allows small businesses and start-ups with less than $5 million in gross receipts to offset the R&D credit against the company’s payroll taxes

These changes favorably affect businesses of all sizes in many industries that are investing in R&D projects and activities here in the U.S.

Do Your Activities Qualify?

Potentially eligible costs for the R&D tax credits include wages, cost of supplies, and contract research expenses, including the cost of testing. As many states also offer R&D tax credits that align with the federal R&D tax credit requirements, the activities and associated expenditures of a company can often qualify for state R&D tax credit as well if the activities meet the same four-part test required for claiming a federal R&D tax credit:

  1. Qualified Purpose - The purpose of the research must be to create a new or improved product, process, or formulation, resulting in increased performance, function, reliability or quality.
  2. Technological in Nature – The research must rely on principles of the hard sciences, such as engineering, physics, chemistry, biology or computer science.
  3. Elimination of Uncertainty – Activities must overcome some unknowns, such as uncertainty as to capability, optimal design, or optimal methodology.
  4. Process of Experimentation – Experimentation can be demonstrated through test batches, simulations, systematic trial and error, or other methods of evaluating alternatives to achieve a desired result.

Proper Documentation is Key

The real issue most businesses have with the R&D credit isn't the math involved in claiming the credit, it’s understanding the nature of what activities and expenditures qualify and how to go about supporting the amount they have claimed with proper and acceptable documentation. Tax Point Advisors expertly guides our clients through the documentation process, taking on much of the work involved in completing that process. The R&D tax credit can be a lucrative incentive for businesses involved in technical activities. Given the permanent nature of the federal R&D tax credit, now is the time to consider whether activities performed by your company qualify for major cash-saving tax credit opportunities.

Request a free assessment to determine qualifying R&D tax credit eligibility.

Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, call us at 800-260-4138 or please leave us a message below.


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