What is R&D 

        The research and development tax credit is a federal incentive that allows companies to reduce income tax liability in the current year dollar for dollar when they are preforming activities related to the development, design, or improvement of things like products, software, process, etc. Many businesses, especially smaller ones, tend to dismiss the federal research and development(R&D) tax credit as either out of reach or too complicated. Consequently, they lose out on potentially significant tax savings every year. When approached with a consistent, long-term strategy, the R&D tax credit can offset costs of a broad range of business processes and bolster a company’s financial health.  California and many other states have a corresponding credit for increasing research as well. 

How can it help 

        The R&D tax credit combines qualified expenses from four different categories: Wages, Outsourced research expenses, supplies and materials, and computing and software costs. The R&D tax credit is available to businesses that approach research with deliberation. The main benefits to the R&D tax credit are reduced federal and state liabilities for current as well as future years, increases in your company’s cash flow, and lowering your business’ effective tax rate. 

How to Qualify for R&D Tax Credits

        The R&D tax credit has a reputation for being difficult to understand and navigate. Like so much of the tax code, the credit’s rules can be stated in a simple way. Although most of the time beneath the surface they have layers of complexity. To claim the R&D tax credit activities must meet four tests before they qualify: 

  1. The Uncertainty Test. At the start of the project the outcome must be unknown. 
  1. The Hard Sciences Test. The process must fundamentally rely on the principles of science or engineering. 
  1. The Business Components Test. The activity’s costs must be associated with an identified part of the company’s trade or business. 
  1. The Process of Experimentation Test. One or more alternatives must be evaluated to achieve a desired result and eliminate uncertainty. 

For more information about whether or not you qualify for R&D tax credits fill out the questionnaire in our get support section.

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