The federal government and many states provide meaningful tax credits to encourage you to solve vexing problems, invent a new product or improve internal processes. A tax credit reduces your tax bill dollar-for-dollar because it acts as an actual payment of your tax bill on your behalf.
The need for business innovation accelerates with each passing day. The Research and Development (R&D) tax credit, permanently expanded in 2015, serves as your incentive to invent, innovate, and improve. Providing federal and state tax credits of up to 50% of your qualified R&D expenses, this tax credit has the power to substantially reduce the financial exposure and risks of trying something new.
Generally, R&D activities must be related to a new or improved business component, defined as new or improved products, processes, internal use computer software, techniques, formulas, or inventions to be sold or used in your business. Additionally, the R&D activity is intended to resolve technological uncertainties and rely on hard science such as engineering, computer science, biological science or physical science.
For further clarity, we offer a few selected examples of recent R&D eligible activities and expenses:
- Example 1
- Example 2
- Example 3
When qualifying R&D activities are identified, we then link qualifying expenses associated with the R&D activities. Qualifying expenses are costs associated with the R&D activities primarily in the following categories:
- Wages paid to employees
- Supplies consumed in the R&D processes
- 3rd party contractor payments to perform qualified R&D activities
Depending on your circumstances, R&D tax credit calculations can be amongst the most complicated of the Internal Revenue Code. We rely on our partners at ADP to identify qualified R&D activities and expenses. ADP calculates approximately 50% of the nations $8 billion of R&D tax credits annually. ADP provides audit support to back up your R&D tax credits in the unlikely event the IRS selects your tax credits for examination.
36 states offer a state R&D tax credit. Take a look at the states where you conduct business to see if you may be eligible for state tax credits too.
