The Research and Development (R&D) tax credit provides a dollar-for-dollar reduction in a business’s tax liability for certain domestic expenses related to the development or improvement of products, processes, performance, and more.
The goal of this tax credit is to stimulate economic growth by encouraging companies from a variety of industries to invest in innovation.
Smaller companies might overlook this benefit, thinking it’s too complex, not worth the hassle, or more appropriate for those larger companies in the industry. But we encourage you to think again. The R&D tax incentive was created to help bolster companies and give them a competitive edge in the market, and the scope of eligibility is fairly broad.
Is the R&D tax credit worth it? What qualifies as research and development? How can you claim the R&D tax credit? Here are the details you need to know.
What Are the Benefits of the R&D Tax Incentive?
Since its inception in 1981, the R&D tax incentive has been one of the most significant credits used by U.S. business owners, as there are many noteworthy benefits.
- It provides an immediate source of cash for many small and mid-size businesses, as they benefit from reduced tax liability. The credit is a dollar-for-dollar reduction against federal and state taxes owed or paid.
- It allows up to 6-16 cents of federal and state R&D credits to be received for every qualified dollar spent.
- Excess tax credits can be carried forward up to 20 years.
- A company can perform look-back studies to recognize unclaimed credits for open tax years (generally the last three years plus the current year)
How Do I Know If I Can Claim the R&D Tax Credit?
Many companies are actually eligible for the R&D tax credit. It applies to not only product development but also companies who engage in data science, focus on quality enhancements, or employ engineers.
Your organization could qualify for the R&D tax credit if it:
- Focuses on creating new or innovative products or improving existing products
- Develops new or improved activities and operations, such as new manufacturing processes, software development, or techniques to be used in your business
- Hires designers, scientists, or engineers or relies on hard science, such as computer science or biological sciences
- Devotes time and resources to the purpose of discovering technological information
Reach Out to Your Tax Expert (Us!) For Further Information
Sure, the R&D credit relates to new products, services, or processes. But don’t forget that it also applies to improving existing products, services, and processes as well.
We encourage you to talk to your tax team here at MGA to help you maximize your R&D tax credit claims. We can help you understand what documents you need to have on hand, what expenses may be excluded, and much more.
If we can make the complex simple for you, let’s talk.
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