Special Service: R&D Tax Credits

Many business owners are unaware or surprised that they qualify for research and development (R&D) tax credits, or lack the time, resources or expertise needed to identify and manage R&D tax credit claims. Any company that designs, develops, or improves products, processes, techniques, formulas, inventions or software may be eligible to receive R&D tax credits, and any company that improves an existing product, makes a building greener or reduces the cost to make a product may be eligible.

The R&D tax credit is not just for patents, emerging technologies and labs filled with PhD’s in white coats. The R&D tax credit can apply to a wide scope of industries – – not just manufacturing but computer software, architects, engineers, food processing firms, government contractors and others. Four types of eligible expenses exist: wages; supplies; contract research; and, basic research payments.

Congress has perceived that research spending declines have adversely affected US economic growth, productivity gains and competitiveness within the global marketplace. The R&D tax credit became law in 1981, has expired eight times, has been extended 13 times by Congress, and enjoys wide bipartisan support. Now, recent federal R&D tax credit laws are much more taxpayer friendly, and the IRS has profoundly changed its position in favor of R&D tax credits.

Over $7.5 billion in federal R&D tax credit benefits are given out annually. About 75% of the R&D tax credits go to only a few of the nation’s largest companies. Businesses with less than $5 million in receipts only received about 7% of R&D tax credits, and less than one in 20 small businesses are aware of and take advantage of the R&D tax credit to which they are entitled.

Myths: the R&D tax credit is only for companies that are inventing something brand-new; only for companies with laboratories and test tubes; is not for companies in my industry; is only for the big companies; will not help me with my state taxes; will not help my company’s bottom line; is too good to be true and must be snake oil; we are going to have tax reform and the R&D tax credit is going to go away.