The Research and Experimentation Tax Credit (known as the R&D Tax Credit) rewards companies that invest resources in innovation and product and process improvements which help to expand our economy.

The R&D tax credit has been in existence since 1981, but changes in regulations in 2001 and 2003 have allowed for additional activities to qualify as research activities. Consequently, many companies that were not eligible in the past may now claim this federal tax credit. Companies may also file amended tax returns to obtain refunds of previously paid income taxes, and in some cases, may be able to recapture taxes paid up to four years ago.

The R&D tax credit is a wage-based tax credit available for the development or improvement of products, processes, techniques, formulas, inventions or software. In addition to qualified wages, companies may capture supply costs for prototypes, as well as 65 percent of contracted labor spent performing qualified research on behalf of the company. Furthermore, over 35 states have an R&D tax credit program as well.

Companies can benefit by both deducting the research expenditures and by claiming the credit. While the research expenditures are a reduction of taxable income, the R&D tax credit is a general business credit, and a dollar-for-dollar reduction of tax. Generally, companies must first use the credit to offset tax for the year the credit is generated, and if additional credit remains, the company may carry the credit back one previous tax year or forward to the next 20 years. 

For more information or to find out if your business may qualify for this credit, please contact Adam Herman, CPA/ABV/CFF, CVA, ASA, CFE or Michael Devereux II, CPA.
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