The research and development (R&D) tax credit is one of the most significant tax credits under the current tax law. The R&D tax credit, a federal tax incentive designed to promote innovation, is a dollar-for-dollar reduction in a taxpayer’s tax liability each year. With appropriate corporate tax planning, businesses can use this credit to implement federal tax planning strategies that maximize their organization’s value.
While long believed to apply only to companies with formal R&D functions, or companies in certain industries, many businesses and related activities (see below) can benefit from R&D credit.
For purposes of the R&D tax credit, the definition of research and development is quite broad. Companies engaged in the development, improvement, and/or refinement of products, processes, formulas, and software should review their business efforts with tax experts to determine if R&D tax credit should be part their future tax planning.
Qualifying R&D expenditures can apply to a range of activities, including but not limited to:
- New concept testing
- New material or product development or testing
- New or enhanced formulation development
- Existing product improvements
- Trial and error experimentation
- Tools, jigs, molds and/or dies design
- Prototype/model design and analysis
- Manufacturing or production process development and improvements
- Software and/or systems development, implementation or upgrades
- Paying outside consultants/contractors to perform any of these activities
Qualified small businesses can apply for the R&D tax credit against alternative minimum tax (AMT) giving the business an opportunity to maximize the credit. Additionally, qualified startup companies may elect to use up to $500,000 of R&D credits against their payroll taxes.
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R&D tax credit is an often misunderstood and overlooked tax benefit. Treasury regulations have substantially broadened the range of taxpayers eligible for the credit. As a result, more companies can take advantage of the R&D tax credit. R&D tax credit should be considered as Chicago businesses evaluate their tax planning strategies. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Selden Fox can help. For additional information call 630.954.1400 or click here to contact us. We look forward to speaking with you soon.
