R&D Tax Credit Explained | Complete Payroll

What is the R&D Tax Credit?

The Research & Experimentation Tax Credit or R&D Tax Credit is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States.

Who should care about R&D?

The Research and Development (R&D) Tax Credit is underused by businesses that could benefit from it, mostly because these companies don’t realize the potential they have to claim it. Often, activities that qualify as research and development go unrecognized because of an unfamiliarity with the R&D credit and recent changes that make it more beneficial to small businesses and start-ups. This leads to billions of dollars going unclaimed every single year. Although this credit has been around since 1981, the PATH Act of 2015 now allows small businesses to claim R&D costs against payroll taxes, resulting in a refund check from the IRS.

What businesses need to know is that they are likely eligible for significant tax benefits if they can answer yes to any of the following questions:

• Has your company developed any new products, processes, or software?
• Has your company improved any existing products, processes, or software?
• Has your company even just attempted to improve existing products, processes, or software?

What qualifies work as R&D?

In addition to answering “yes” to any of the questions above regarding the development or improvement of products, processes, and software, there are some important eligibility requirements that the work must meet.

Here is a list of what does not qualify:

• Research conducted after the beginning of commercial production.
• Research adapting an existing product or process to a particular customer’s need.
• Duplication of an existing product or process.
• Surveys or studies.
• Research relating to certain internal-use computer software.
• Research conducted outside the United States, Puerto Rico, or a U.S. possession.
• Research in the social sciences, arts, or humanities.
• Research funded by another person (or governmental entity).

Check out our free PDF Guide on Claiming Your Research & Development Tax Credit to learn how the credit works and how you can leverage it for your business.