R&D Tax Credit

The Research and Development (R&D) tax credit continues to be one of the best opportunities for businesses in the U.S. to reduce their tax liability substantially. Companies from various industries can qualify for this government-sponsored tax benefit just by performing their day-to-day activities. The R&D tax credit, as prescribed in 26 U.S.C. § 41, may be claimed by taxpaying businesses that develop, design, or improve products, processes, formulas, or software.

The credit was introduced in 1981 to increase technical jobs in America by encouraging businesses to invest in innovation. The distinction is calculated based on the wages of the employees performing the qualifying work, making it the most valuable tax incentive available to American businesses. Furthermore, it can be availed at the federal and state levels, with over 30 states giving credit to balance state tax liability.

The R&D tax credit is for businesses of all sizes, not just major corporations with research labs. However, what constitutes R&D concerning the credit is much more expansive than business owners realize, now with an extensive list of activities qualifying for the credit, such as processes related to applied sciences or other technical projects.

Many businesses are still unaware that R&D credit eligibility extends beyond product development to include activities and even operations such as the latest manufacturing methods, software development, and quality improvements. Even start-ups may be able to utilize the R&D tax credit against their payroll tax for up to 5 years.

So, if your company does any of the following, your business likely qualifies for the R&D tax credit:

Several factors go into claiming the research and development tax credit. Since companies may claim the credit for both current and prior tax years, they can benefit from documenting their R&D activities to ensure that they are eligible to claim the credit in both situations.

Businesses need to continuously evaluate and document their research activities to authenticate the expenses consumed for each qualified research activity. While some estimations may be involved, they must have a genuine basis for the assumptions used to create those estimates.

Established in 1981, the R&D tax credit has gradually evolved, with new legislation, regulations, and judicial precedent expanding the number of businesses that can benefit from the credit and the savings accrued through this incentive.

The most impactful changes have occurred within the last two decades.

Yes! The Protecting Americans from Tax Hikes (PATH) Act of 2015 leveled the playing field among companies, irrespective of size, allowing start-ups and small corporations alike to mitigate alternative minimum tax (AMT) limitations against the R&D tax credit.

Start-ups and small businesses may qualify for up to $1.25 million (or $250,000 each year for up to five years) of the federal R&D tax credit to offset the Federal Insurance Contributions Act (FICA) portion of their annual payroll taxes.

To be eligible, a company must:

• • Have less than $5 million in gross receipts for the credit year; and
  • Have no more than five years of gross receipts.

While the TCJA implemented several sweeping reforms to the tax code in 2017, the R&D tax credit remains in place as one of the most valuable incentives available for the benefit of U.S. businesses.

Since its creation in the 1980s, the R&D tax credit incentive (section 41 of the US TAX Code) has become the most significant tax credit available in the country. From elections to tax reform to shifts in the global economy, more and more businesses have readjusted their respective industry strategies to leverage this tax credit and remain competitive.

In 2021 alone, we delivered over $2.3 Billion in credits and incentives to over 14,000 Businesses. We don’t want to stop there. alliantgroup has assembled teams of talented industry experts to research and provide information that you need to understand how Section 41 can genuinely benefit your business fully.

Download our whitepaper to understand the tax saving benefit of the R&D tax credit.

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