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R&D Tax Credits: Examples, Qualifications, & Requirements

Does your business take full advantage of tax credit and deduction opportunities?

Tax credits and deductions can save organizations thousands of dollars annually, and businesses that fail to claim the credits they qualify for are losing out on beneficial money-saving opportunities.

By better understanding tax credits, you can ensure that your company benefits from opportunities to reduce taxable income and is set up for success during tax season.

What Is the R&D Tax Credit?

Research and development (R&D) tax credits are available for organizations that participate in activities and have expenses related to research, innovation, and experimentation. Specifically, expenses related to the development or improvement of products, techniques, inventions, formulas, or software can qualify for R&D credits.

Businesses that receive R&D credits not only receive a dollar-for-dollar tax credit but also can continue to deduct research and development expenses from their federal taxable income.


R&D Tax Credit Examples

A wide range of business activities can qualify for the R&D tax credit. Here are just a few examples of activities that may meet the criteria:

  • Developing intellectual property
  • Devoting time and resources to manufacturing or developing new or innovative products
  • Hiring scientists, designers, or engineers who are engaged in qualified activities
  • Redesigning or enhancing an existing product
  • Developing or improving an existing process
  • Conducting research or testing and documenting the results
  • Designing new processes, patents, techniques, formulas, prototypes, or software

Additionally, certain amounts of salaries, supplies, contractors, or cloud-based hosting could fall under the R&D tax credit umbrella.

What Are the R&D Tax Credit Qualifications & Requirements?

The Internal Revenue Service (IRS) outlines strict qualifications and requirements for tax credits and deductions, including the R&D credit. If you are unsure whether your business activities qualify for research and development tax credits, consult an experienced tax professional or accountant.

Who Qualifies for R&D Tax Credits?

R&D credits are available to any organization engaging in certain activities within the United States. Your business doesn’t have to operate in the technology or life sciences industries to qualify for this lucrative credit. If your company works to develop or improve a product or process, you may be eligible for R&D tax credit—no matter your industry or whether you have a dedicated R&D laboratory. Many expenses tied to innovation and experimentation are relevant.

What Activities Qualify for R&D Tax Credits?

R&D tax credits apply to a variety of expenses relating to the development or improvement of a business component. These expenses can include wages, contractor payments, supplies, equipment, and more.

Activities that qualify for R&D tax credits generally have to meet the IRS’s four-part test to determine eligibility:

Permitted purpose:

The activity is related to developing or improving the functionality, performance, reliability, or quality of a business component such as a product, process, technique, formula, invention, or software

Elimination of uncertainty:

The organization has faced uncertainty while designing or developing the business component

Technological in nature: 

The development of the business component is based on a hard science (engineering, physics, chemistry, etc.) or on the life, biological, or computer sciences

Process of experimentation: 

The organization has considered multiple alternatives or applied a trial-and-error approach to overcome uncertainties

Some activities are excluded from qualifying for the R&D tax credit, including the following:

  • Research in the social sciences
  • Research after commercial production of a business component
  • Adaptation of existing business components to a particular customer’s need
  • Duplication of an existing business component
  • Surveys and studies
  • Foreign research

Additionally, R&D tax credits are restricted to the portion of qualified research performed in the United States.

How to Claim R&D Tax Credit

Your business can claim qualifying R&D tax credits by filing the relevant IRS form along with supporting documentation. To ensure you are taking full advantage of available R&D credits and tax deductions, get help from an experienced tax professional.

Maintain Relevant Documentation

Before filing the right IRS forms, you must have relevant documentation in hand. Save the receipts and paperwork necessary to support your claim, and organize documentation so it’s readily available for tax season.

Common documentation for R&D tax credit claims includes employee records (W-2s, timecards, paystubs, hours worked, etc.), contractor agreements (purchase orders, invoices, contracts, 1099-NECs, etc.), and supplies (invoices, receipts, etc.) for materials and equipment related to R&D.

File IRS Form 6765

To claim R&D credit, file IRS Form 6765: Credit for Increasing Research Activities. This process also requires businesses to identify qualifying expenses and provide supporting documentation that proves those costs meet IRS R&D tax credit requirements.

Consult a Tax Specialist

Before filing the right IRS forms, you must have relevant documentation in hand. Save the receipts and paperwork necessary to support your claim, and organize documentation so it’s readily available for tax season.

Understanding the complex tax system in the United States can be challenging for any business. However, without deep knowledge of tax credits and deductions, you may be missing out on valuable money-saving opportunities. That’s why we recommend consulting with a certified public accountant (CPA) or tax specialist who can determine which programs will best benefit your business and ensure you secure the savings you deserve.

Contact the Expert Tax Professionals at Fisher, P.A.

Call us at 704.332.7800 or fill out our contact form today to schedule a consultation.

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