The R&D Tax Credit: Do You Qualify?

One of the most under-claimed credits available for businesses is in the area of research and development. Companies that qualify but fail to claim the R&D credit miss an estimated $3 billion and $4 billion in tax savings each year. Recently the rules have been updated to allow companies to claim R&D credits on amended returns from past years making available even more opportunity for businesses to take advantage of it. Tax Credit

What is the R&D Tax Credit: The Research and Experimentation Tax Credit (otherwise known as the R&D credit), was first implemented as part of the Economic Recovery Act of 1981. Since its original inception, it has expired and been extended several times. The credit is for “qualified research” activity that is generally intended to yield a scientific or technological innovation. To qualify, companies must meet four general requirements:

  • Permitted Purpose: Research conducted must be on a project that creates or improves upon a qualified business component such as a product, invention, technique, etc.
  • Elimination of Uncertainty: The research must be designed to remove existing uncertainty about how a product or other business component functions, thus allowing for improvement of said component.
  • Experimental Process: During the research, the company must experiment with one or more alternatives to assist in the elimination of the uncertainty around the business component being researched.
  • Technological/Scientific: The experiment must be conducted in a technological or scientific manner so as to ensure the reliability of the conclusions drawn.

R&D Credit Expiration Concerns: Some companies may be tempted to pass on pursuing the R&D tax credit because it expired at the end of 2013 and as of August 2014 has yet to be renewed. It is important to bear in mind, however, that this credit has been extended 14 times since its inception 33 years ago. Most analysts believe that there is a strong chance it will be renewed again this year and made retroactive to the beginning on 2014. So if you believe you may qualify, do not put it on the back burner because of the possibility of its expiration.

How do I know if I Qualify: The R&D credit has very stringent guidelines for qualification as well as additional exclusions. To find out if your business is eligible, it is best to speak with your local accountant about the research your company has done this year and in past years. With the ability to amend past tax returns, you never know how much tax savings you may qualify for. Contact a professional tax accountant for more information.


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