Research and Development Tax Credits
The Research and Development (R&D) Tax Credit is a permanent federal tax incentive meant to stimulate innovation, technical design and manufacturing within the U.S. Most states have a similar tax incentive as well. While available since 1981, tax regulations that were finalized in December 2003 significantly increased the types of activities that qualify for the credit. Companies no longer needed to develop a product or process that was new to their industry, it only needed to be new to them.
Companies of all sizes and in many different industries can now qualify for these dollar-for-dollar tax credits. Some of the industries that qualify for the credit include manufacturers, tool and die / job shops, plastic mold injection, software developers, architectural and engineering firms, construction contractors, food processors, chemical companies, agribusiness and apparel/textile companies, among others.
Less than a third of the companies that qualify for the R&D tax credit actually utilize it. In addition, many of the companies that are taking the credit are not claiming all of the credits to which they are entitled.
We work with CPA firms across the country to help their clients identify and capture federal and state R&D tax credits. Our R&D tax credit experts, made up of attorneys, CPAs and engineers, conduct a thorough and yet non-evasive analysis into a company’s operations to identify all qualifying R&D credit activities and related expenditures in order to maximize the company’s credits.
We can typically conduct a study for all open tax years, the current year and the prior three years. Any unused credits carryforward for 20 years. These credits can result in significant refunds from prior years and a substantial reduction to federal and state income taxes in the current and future years.
Two Significant Enhancements to the R&D Tax Credit Beginning in 2016
- Companies with less than $50 million in gross receipts (prior 3 year average) can use R&D credits to reduce Alternative Minimum Tax (AMT). This is very significant, especially for flow-thru entities, whose owners are in or close to AMT every year.
- “Start-up companies” (companies with less than $5 million of gross receipts for the year and no gross receipts more than five years ago) can use R&D credits to reduce a portion of their federal payroll taxes going forward – specifically the employer’s Social Security portion of FICA taxes (6.2% of wages up to $127,200 per employee in 2017).
The R&D Tax Credit is one of the most significant tax incentives remaining under current tax law – a substantial tool for maximizing a company’s cash flow and bottom line.
R&D Tax Credits Available by State
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