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 encompassing 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.
Each state in the U.S. can offer its own Research and Development (R&D) Tax Credit, which is usually combined with the federal tax credit, although it’s important to note that not all of them encompass the benefit. Additionally, U.S. companies can benefit from an incremental R&D tax credit, which consists of two calculation methods: the Regular 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 taxpayer must intend to apply the information being discovered to develop a new or improved business component of the taxpayer. A business component is any product, process, computer software, technique, formula, or invention, which is to be held for sale, lease, license, or used in a trade or business of the taxpayer. - 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. Qualified activities must intend to discover information that would eliminate uncertainty concerning the development or improvement of a product. Uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing or improving the product or the appropriate design of the product. (it must be technical uncertainty) - 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. The qualified research must rely on principles of Physical or biological science, Engineering, Computer science - 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. The activity must involve a process of evaluating one or more alternatives through modeling, simulation, systematic trial and error, or other methods to resolve the uncertainty.
