How Much Is the R&D Credit Worth?
The federal R&D tax credit is one of the most lucrative tax incentives out there. It is a dollar-for-dollar offset against income taxes, generally ranging between 5% and 10% of eligible R&D expenses.
Explore with our free calculator – how much tax savings could the R&D tax credit generate for you?
What Is the Purpose of the R&D Tax Credit?
The R&D credit was created to incentivize companies to invest money into the development of new and improved products. The government realizes that new products lead to increased tax revenues and that an incentive like this helps keep high-paying technical jobs in the U.S., resulting in U.S. companies and the U.S. economy as a whole remaining competitive both domestically and internationally.
Must Companies Be in a Specific Industry to Benefit from this Tax Credit?
No—companies in a wide range of industries are eligible. This credit is not only for technology companies or manufacturers!
Is the R&D Tax Credit Only for Large Companies?
No! Companies of any size are eligible, from sole proprietorships with no employees to Fortune 50 companies with more than 100,000 employees. Unfortunately, while most eligible large companies already claim the R&D tax credit, many eligible small companies fail to take advantage of this valuable tax benefit.
Can Companies that Don’t Develop New Products Take Advantage of this Tax Credit?
Quite possibly! In today’s business environment, more companies than ever before are eligible. Any company that invests in new or improved production processes, computer software, techniques, designs, formulas, or products can take advantage of the R&D tax credit. Examples of non-obvious companies that can qualify are:
- An HVAC company that designs and engineers the HVAC systems they install
- A bank that invests in developing custom loan origination or servicing software
- A contract manufacturer that develops the process to fabricate a customer’s parts, even if the customer itself handles designing the parts .
Can the R&D Tax Credit Also Reduce State Income Taxes?
Yes, many states offer their own R&D tax credits for R&D expenses incurred within that state. The value of state R&D tax credits varies widely, but it generally ranges between 3% and 15% of state-specific eligible R&D expenses.
Find out if your state offers an R&D tax credit with our free calculator.
What Types of Expenses Are Eligible for the R&D Tax Credit?
- Wages of U.S. employees involved in design, development, testing, or other research activities
- Payments to U.S. vendors involved in these activities
- Materials used during these activities
- Payments to lease cloud-based software development environments
Is the R&D Tax Credit New?
The R&D tax credit has been around since 1981. Since then, it has been expanded many times, and in 2015 the Protecting Americans from Tax Hikes (PATH) Act made the credit permanent. The R&D tax credit is currently more popular and heavily used than ever, as more companies in a wide array of industries are investing in new technology.
Can Companies Calculate and Claim this Tax Credit on Their Own?
The R&D tax credit is one of the most complex and ambiguous items in the tax law. Enlisting experts who understand this law and how to apply it to your business is crucial to calculating and claiming a valid tax credit. Additionally, companies that claim the credit on their own often fail to include all eligible expenses and end up with smaller credits than they deserve.
What Is the Process of Claiming the R&D Tax Credit?
At Firestone, we use a no-risk, three-step solution to help companies obtain the maximum R&D tax credit available. Read about this process in detail here.
Must Companies Have Specific Documentation “Proving” R&D in Order to Claim the Tax Credit?
No. There is no specific record-keeping requirement, and many court cases have confirmed that R&D credits can be supported by testimony that reasonably demonstrates a factual basis for claiming the R&D tax credit.
Must Companies Implement Special Systems or Accounting Procedures to Claim the R&D Tax Credit?
No. At Firestone, we work with companies to develop support for any R&D tax credits claimed without implementing expensive systems or time-consuming new procedures. We focus on leveraging existing records and data to maximize efficiency and minimize intrusion.
What Forms Do I Have to File to Obtain the R&D Tax Credit?
The R&D tax credit must be claimed on a company’s income tax return. The tax credit can be claimed on original tax returns, and up to three years’ of previously filed tax returns can be amended to claim the R&D tax credit! Any R&D credits claimed reduce the amount of income taxes due.
Must Companies Generate Profit and Income Taxes to Take Advantage of the R&D Tax Credit?
Not necessarily. The R&D tax credit is not a refundable credit; it cannot generally reduce income taxes below $0. Most companies must generate income taxes to receive an immediate benefit from the tax credit. Any tax credits not used carry forward for up to 20 years to be used against future income taxes.
However, the 2015 PATH Act added a provision enabling start-up companies in their first five years of existence and with current-year revenues below $5 million to offset up to $250,000 of their FICA payroll taxes with the R&D tax credit, regardless of profitability.