The Research and Development (R&D) tax credit is a dollar-for-dollar credit that is designed to stimulate innovation, growth and global competitiveness in public and private U.S. companies. By the Internal Revenue Service (IRS) definition, any taxpayer engaged in the “design or development of new or improved products or processes, techniques, formulas, inventions or software is engaged in R&D.”
The vast majority of companies are engaged in efforts to improve products and processes as part of their day-to-day operations and the IRS defines these activities as R&D. The IRS recognizes that many of these changes are evolutionary rather than revolutionary in nature. Therefore, it is not necessary for the improvements to be significant enough to be patentable.
Moreover, R&D tax credits can apply to a variety of companies including, but not limited to, manufacturers, software developers, engineers, design/build contractors, and architects. If a company performs any of the following activities, it may qualify for a substantial tax credit:
- Manufacture products
- Develop software or hardware
- Develop new, improved, or more reliable products/processes/formulas
- Develop prototypes and models, including computer-generated models
- Develop temporary structures used in the construction process
- Develop or apply for patents
- Design tools, jigs, molds, and dies
- Design products to customer specifications
- Design buildings to achieve a certain energy efficiency goal
- Design buildings with unique features or space plans And more!
The R&D Credit expired as of December 31, 2013. However, with a potential tax reform on the table, Congress and the president have the opportunity to not only renew the R&D Credit, but to also make it permanent, partially refundable for small start-ups, and increase the credit percentage. In doing so, the United States will retain more businesses domestically, fueling economic growth and making the United States more competitive globally.
Tax consultants, like the Encore Tax Consulting Group, Inc., can help companies identify their tax credit eligibility. Contact the SCVEDC if you have not yet considered the R&D tax credit program, because qualified companies may be able to take advantage of these tax credits as far back as four years for State and three years for Federal.
Our next R&D tax credit consultation event will be held mid-summer. Please let us know (Phone: 661-288-4400) if you would like to reserve a 20-minute consultation at our next event!