Federal Research and Development Tax Credit
The Federal Research and Development (R&D) Tax Credit is a tax incentive the United States government provides to incentivize businesses to invest in research and development activities. The credit is calculated based on a business’s qualified research expenses (QREs) in a given tax year. The credit was first introduced in 1981 and has been modified several times, including expansions in 2015 and 2022. In addition to expanding the amount of the credit, these expansions also made the credit available to certain “pass-through” entities, such as partnerships and S corporations, which previously could not claim the credit.
The scope of applications for the R&D tax credit is broad, as it applies to a wide range of industries and business types. Any company that engages in research and development activities, such as developing new products or processes, improving existing products, or developing new software or technology, may be eligible for the credit. The credit is generally equal to a percentage of the QREs, which include wages, supplies, and contract research expenses incurred in the conduct of qualified research activities. The credit can be up to 20% of the eligible expenses, but the actual percentage depends on various factors such as the taxpayer’s industry, the type of research activities, and whether the research is conducted in collaboration with a government entity.
One of the key benefits of the R&D tax credit is that it can help businesses offset their tax liability, reducing the amount of taxes they owe to the government. This can be particularly helpful for small businesses and startups with limited financial resources. In addition, the credit can help businesses reinvest in their research and development efforts, which can lead to further innovation and growth.
To claim the R&D tax credit the business must file Form 6765, Credit for Increasing Research Activities, with their tax return. The form requires detailed information about the company’s research activities, expenses, and any subsidies or grants received for those activities.
Claiming the R&D tax credit can be a complex process, and often the full potential benefits of the credit are not realized due to a lack of knowledge by the tax preparer. PM Business Advisors has assisted dozens of clients in claiming the Federal R&D Tax Credit. Please contact us if you have any questions regarding your eligibility for the Federal R&D Tax Credit.