US Research & Experimentation
The R&E 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&E tax credit program as well.
R&E Tax History
Originally included within “The Economic Recovery Tax Act” of 1981 was a provision called the “Credit for Increasing Research Activities”. This credit was tailored to reverse the decline in U.S. research spending by providing an incentive that was premised on benefiting increases in (as opposed to total) year over year research spending.
Subsequently,embodied within House Report No. 97-201 (H.R. 4242) and then later codified by the Tax Reform Act of 1986, ‘Qualified Research’generally constitutes private sector or commercially driven development effort intended to yield innovation within a scientific or technological field. However, in 2011, significant rulings have been issued in the preceding few years (with more in process) as technology and methods change which is a by-product of what the Credit, ironically, was designed to promote.
It is important to note that recently new legislation was passed to make the program permanent starting in 2016! Also, for credits determined for tax years that begin after Dec. 31, 2015, eligible small businesses (generally, those with $50 million or less of gross receipts, see below) may claim the credit against their AMT liability. (Code Sec. 38(c)(4)(B)(ii)). In addition, for tax years that begin after Dec. 31, 2015, start-up companies with gross receipts of less than $5 million may elect to claim the R&D credit against payroll tax liabilities.
There are four basic requirements for research activities to qualify:
- Qualified research activities are defined as the development or improvement to a business component, which is defined as a product, process, technique, formula, invention or software.
- The research must be technological in nature. That is, the process of experimentation used to discover the information fundamentally relies upon the physical or biological sciences, engineering or computer science. Furthermore,companies may use existing technologies and may rely upon existing principles to satisfy this requirement.
- There search must be intended to eliminate uncertainty concerning the development or improvement of a business component. Uncertainty exists if the capability or method for developing the business component is unknown, or if the appropriate design of the business component is unknown.
- Elimination of the technical uncertainty must be accomplished through a simulation.
Activities That May Qualify
- Developing new products
- Developing new, improved or more reliable products,processes or formulas
- Developing prototypes or pilot models
- Developing new tools, jigs, molds or dies
- Developing or applying for patents
- Testing new product designs
- Developing new technology
- Developing or improving production or manufacturing processes
- Developing new software applications
- Expending resources on outside consultants or contractors to do any of the above-stated activities
IRS R&E Guidelines
For more information on IRS R&E Guidelines, see:
Pricing varies by case, please contact us to request a quote.