When to Use Research and Development Tax Credits
The federal Research and Development Tax Credit—also called the Research Tax Credit or the Research and Experimentation Tax Credit—is a dollar-for-dollar, wage-based tax reduction that rewards companies for investing in qualified research activities. It could mean thousands of dollars for your business, because it credits 20 percent of your qualified research expenditures that exceed a base sum, as well as 65 percent of contracted research labor.
Contrary to popular belief, the research tax credit is not just for technology and pharmaceutical companies. It can also be used by qualifying manufacturers, engineers, architects, and other types of businesses. Please note: In addition to federal tax credits, individual states may offer similar incentives. Check with your state government to find out.
Does your business qualify for research and development tax credits? It may if you engage in one of these activities:
- Design new products
- Improve existing products
- Improve manufacturing processes through technology
- Develop new formulas or techniques
- Improve customer part designs to improve manufacturability
- Design tools, fixtures, molds, or dies
- Develop prototypes or models (including computer generated models)
- Apply for patents
- Test new concepts or technology
- Implement robotics or production control software
- Streamline or improve production or manufacturing processes to achieve higher standards in quality and productivity
- Perform certification testing
- Expend resources on outside consultants or contractors to conduct any of the above-stated activities
If you meet one of the above criteria, you must also meet all four of these basic requirements:
- Meet the definition of qualified research activities. Qualified research activities are defined as “the development or improvement to a business component, which is defined as a product, process, technique, formula, invention or software.”
- The research must be technological. That is, your experimentation process relies on the physical or biological sciences, engineering, or computer science technologies.
- Eliminate uncertainty. Your research must eliminate uncertainty in the development or improvement of a business component.
- Need of experimentation process. You must eliminate technical uncertainty through a process of experimentation, including systematic trial and error, modeling or simulation.