The Research and Development Tax Credit (IRS Tax Code Section 41) is a government sponsored tax incentive that rewards companies for conducting R&D in the United States. The credit was implemented to incentivize innovation, experimentation, and business improvement throughout the economy and to keep jobs here in the U.S. The R&D Tax Credit is for businesses of all sizes. Activities related to applied sciences and other technical projects qualify companies from numerous industries. We find that many companies are eligible thanks to an expansive list of activities that fall under the guidelines of the credit in the tax law.

Qualified activities are defined by a 4 part test:

1. Technological in nature

2. Intended to eliminate uncertainty

3. Experimental in the sense that the activity is systematically trial and error

4. Performed with a purpose to improve performance or functionality

The more a company spends on innovation and development, the more they can potentially recoup in credits. Some clients save a few thousand dollars each year, while others save millions. The specific amount of credit a company can claim depends on several factors. Generally, the amount of federal credit equals 5% 10% of a company’s R&D expenses for that year, though in some cases the credit can be as high as 14%. A company’s total R&D credit benefit can also be much higher if they operate in states with applicable R&D credits as well.

Eligible startup companies and small businesses may also be able to apply their federal R&D credit to offset the company’s portion of payroll taxes if they have little to no federal income tax liability. These companies can apply up to $250,000 per year, for up to five consecutive years, of their federal R&D credit to offset payroll taxes. That’s a potential $1.25 million in immediate applicable benefit to start up companies and small businesses.

The vast majority of CPAs don’t have the resources or time to utilize the Research and Development credit for their clients. Completing a Research and Development tax credit study takes a team of specialized individuals who understand both the ins and outs of business operations as well as business finance.