Internal Revenue Code §41 known as the Research & Experimentation Tax Credit or the R&D Tax Credit is a general business tax credit for companies that are incurring R&D expenses in the United States. The R&D Tax Credit was originally introduced in the Economic Recovery Tax Act of 1981.

Every year, the R&D credit yields billions of dollars in federal and state benefits to companies engaged in qualifying activities. Thousands of companies take advantage of the credit across several industries.

Some of the common industries that qualify for the R&D tax credit include, but are not limited to:

  • Manufacturing & Fabrication, Software Development, Engineering, Architecture, Pharmaceutical, Machining
  • Aerospace & Defense, Food Science, Tool & Die Casting, Foundries, Automobile, Chemical & Formula, Agricultural

Qualified R&D Activities

If your company is involved in any of the following activities, you may be eligible to claim the credit:

  • Developing an innovative product that is new to the market
  • Engineering and designing a new product Research aimed at discovering new knowledge
  • Searching for ways to apply new research findings
  • Designing product alternatives, evaluating product alternatives
  • Significant modifications to the concept or design of a product
  • Designing, constructing, and testing preproduction prototypes and models
  • Engineering activity to advance the product’s design
  • Systems processing modeling, system and functional requirements analysis, integration analysis
  • Experimenting with new technologies,new material and integrating the material to improve manufactured products
  • Engineering to evaluate new or improved specification/modifications in terms of performance, reliability, quality, and durability
  • Developing new production processes during prototyping and preproduction phases
  • Research aimed to significantly cut a product’s time-to-market, aimed to obtain more efficient designs
  • Developing and modifying research methods, formulations, products
  • Paying outside consultants, contractors to do any of the above activities

Potential Benefits

Potential benefits of the R&D tax credit can include:

  • Up to 13.5 cents of R&D tax credit for every qualified dollar
  • Dollar-for-dollar reduction in your federal and state income tax liability
  • Increased in earnings-per-share
  • Credit carried forward up to 20 years
  • Look back studies can recognize unclaimed credits for open tax years (generally 3 or 4 years)

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