What is it?
The Research & Experimentation Tax Credit (R&D) is available as a tax incentive for companies within the United States that incur research and development costs.
What’s the benefit?
The credit is based on the amount of investment by the company on items of R&D including wages and supplies. The more costs incurred, the greater the potential benefit.
How does it work?
Companies that perform activities that are…
- technically uncertain
- involve a process of experimentation
- technological in nature
- creating something new or improving products or process
…may be able to claim additional tax credits through analyzing these costs.
Examples include developing new products, devices and certain software.
Activities a company performs during a year are analyzed to determine their eligibility as R&D for tax purposes. The costs associated with these activities are then identified and depending on the company’s history of these activities, the credit available is computed, and documentation is retained to support the savings.
Payroll tax offset
The Protecting Americans from Tax Hikes (PATH) Act of 2015 increased the attractiveness of claiming the R&D credit for new and start-up companies by allowing qualifying companies to offset their payroll tax liability as opposed to their federal income tax liability. Since start-ups tend to have losses but still incur significant spend for R&D activities, the incentive was missing otherwise qualifying companies. To fix this disconnect, the PATH act allowed companies with payroll-tax liabilities to claim a credit of up to $250,000 per year as an offset to their payroll liability. To qualify as a start-up and take advantage of this offset, the company must:
- Have gross receipts for five years or less and;
- Less than $5 million of gross receipts in the year the credit is elected.