The Research and Experimentation Tax Credit: How do I Qualify?

When you hear “Research and Experimentation tax credit”, you’re probably thinking it only relates to technology, medical and pharmaceutical companies. Actually, that’s not true. In the past few years, legislation has substantially increased the amount of taxpayers eligible for the credit. This is because “qualified activities” no longer need to result in new technological knowledge; they merely need to use technology to develop new or improved products, processes, software, etc. Some common industries that qualify for the credit include: aerospace, agriculture, automotive, engineering, construction, food science, general manufacturing, hardware and software development, pharmaceuticals, telecommunication, and more.

Based on the number of industries that qualify, you can understand how it’s easy to overlook this tax credit. This is primarily because people don’t truly understand how to qualify for it. The R&D Tax credit is a federal tax credit that was created to stimulate innovation. Companies receive the credit on their tax return for expenses incurred researching and developing products, processes, software, etc. This lowers their tax due and therefore makes more funds available to be invested in additional research and experimentation. The credit applies to “qualified activities” to develop new, improved and more reliable products, processes, and software. Some of the activities include but are not limited to:

  • Developing or testing new products or materials
  • Developing new or enhanced formulations
  • Testing new concepts
  • Improving existing products
  • Trial and error experimentation
  • Designing tools, jigs, molds and dies
  • Design and analysis of prototypes or models
  • Developing or improving production or manufacturing processes
  • Developing, implementing or upgrading systems/software
  • Paying outside consultants/contractors to perform any of these activities

Calculating the credit is not an easy process; an outside party must conduct a study to determine whether or not you would qualify for the credit. However, if you think the above activities fit your regular course of business, it’s worth taking a look. Contact your Anders advisor for more information.