The R&D tax credit, initially established in 1981, underwent multiple temporary extensions until it was made a permanent fixture in the U.S. tax code in 2015 with the passage of the Protecting Americans from Tax Hikes (“PATH”) Act.
The R&D Tax Credit is a federal tax incentive designed to encourage businesses to invest in research and development activities. The credit is equal to a percentage of the cost of these activities, allowing businesses to offset some of the costs of innovation and reap the rewards of their investment.
Qualifying for the R&D Tax Credit
Companies can qualify for the R&D Tax Credit if they are engaged in activities that meet the definition of qualified research under the tax code. These activities vary by industry.
To qualify for the credit, the research must meet four specific criteria, commonly known as “the four part test”:
- New or Improved Business Component
- Elimination of Uncertainty
- Process of Experimentation
- Technological in Nature
The R&D Tax Credit can be a valuable source of funding for your company, allowing you to offset the costs of innovation and maximize your profits. To determine if your company is eligible for the credit, it is recommended that you work with a tax professional or a financial advisor who is experienced in the R&D Tax Credit.
Maximizing Your Benefits
To maximize the benefits of the R&D Tax Credit, it is important to keep detailed records of your research and development activities. This may include records of employee time and expenses, as well as records of materials, supplies, and other expenses related to the research.
In addition, it is important to understand the tax rules, regulations, and relevant case law surrounding the R&D Tax Credit, as well as the calculation of the credit. This will ensure that you are taking advantage of all available benefits and maximizing your tax savings all the while conducting the proper substantiation methods.
The R&D Tax Credit can be a valuable source of funding for companies engaged in research and development activities. To qualify for the credit, companies must meet specific criteria and keep detailed records of their research and development activities. By working with a tax professional, companies can take advantage of this valuable tax benefit and unlock their potential for growth.
Contact KC&A today for your free R&D tax credit assessment and evaluation
