What Is The R&D Tax Credit?
The Research and Development (R&D) Tax Credit is a government-sponsored tax incentive that rewards companies for conducting research and development in the United States. The credit was implemented to incentivize innovation throughout the economy and keep technical jobs within the country.
The R&D Tax Credit is available to a wide range of disciplines comprised in the applied sciences field and other technical research areas. Consequently, companies from numerous industries qualify to receive this incentive.
Research and Development Tax Credits were created to be accessible to businesses of all sizes, not just major corporations with research labs. Therefore, many companies and a large list of activities are eligible for the credit.
Every state in the U.S. can offer its particular R&D Tax Credit, which is typically combined with the federal one. Moreover, U.S. Companies can benefit from an incremental R&D tax credit, made up of two different incentives known as the Traditional R&D Tax Credit and the Alternative Simplified Credit.
How Does The R&D Tax Credit Work
A four-part IRS enforced test determines eligibility for the R&D Tax Credit. An activity must meet all parts to qualify. The four-part test:
- Business Component Test
The company will have to prove that a new or improved product, process, computer software, technique, invention, or formula was developed and will be used to enhance the activities of the trade it belongs to. - Uncertainty Test
A business will have to demonstrate that the procedure followed to develop a product or process was necessary in order to improve the aforementioned. - Technology Test
The company will have to illustrate that principles of physical or biological sciences, engineering, or computer sciences were used during the experimentation process. - Experimentation Test
To satisfy this test, the applicant will have to demonstrate that they went through a process of elimination, trial, and error to achieve the final product or process.
