The federal government and many states provide meaningful tax credits to encourage you to solve vexing problems, invent a new product or improve internal processes. A tax credit reduces your tax bill dollar-for-dollar because it acts as an actual payment of your tax bill on your behalf.

The need for business innovation accelerates with each passing day. The Research and Development (R&D) tax credit, permanently expanded in 2015, serves as your incentive to invent, innovate, and improve. Providing federal and state tax credits of up to 50% of your qualified R&D expenses, this tax credit has the power to substantially reduce the financial exposure and risks of trying something new.

Generally, R&D activities must be related to a new or improved business component, defined as new or improved products, processes, internal use computer software, techniques, formulas, or inventions to be sold or used in your business. Additionally, the R&D activity is intended to resolve technological uncertainties and rely on hard science such as engineering, computer science, biological science or physical science.

For further clarity, we offer a few selected examples of recent R&D eligible activities and expenses:

  1. Example 1
  2. Example 2
  3. Example 3

When qualifying R&D activities are identified, we then link qualifying expenses associated with the R&D activities. Qualifying expenses are costs associated with the R&D activities primarily in the following categories:

  • Wages paid to employees
  • Supplies consumed in the R&D processes
  • 3rd party contractor payments to perform qualified R&D activities

Depending on your circumstances, R&D tax credit calculations can be amongst the most complicated of the Internal Revenue Code. We rely on our partners at ADP to identify qualified R&D activities and expenses. ADP calculates approximately 50% of the nations $8 billion of R&D tax credits annually. ADP provides audit support to back up your R&D tax credits in the unlikely event the IRS selects your tax credits for examination.

36 states offer a state R&D tax credit. Take a look at the states where you conduct business to see if you may be eligible for state tax credits too.