Tax Help for American Companies with the Research and Development Credit

Written By: Christine Dantz

March 2016

A little known tax credit, available to many businesses in the U.S., just got a boost from the 2016 Budget with Tax Extenders, passed by Congress in late 2015, and signed into law shortly after by President Obama. The Tax Extenders made the three decades old Research and Development credit permanent. It also has the potential to save manufacturers, of all sizes, a substantial amount of money each year on their taxes; providing even more incentive for reshoring American manufacturing.

Research and Development are the Key to Innovation

Without research and development, companies fail to build new, innovative ideas that are the driving force behind progressive future and the main ingredient that fuels economic growth.

Tax Help for American Companies with the Research and Development Credit

You might think this is obvious, so why would a company dump its research and development team when it's the key to continued success? One reason why many companies recognize the need for research and development, yet, don't utilize it as a business tool, is because of the cost.

That's where the Federal Research and Development tax credit (R&D Credit) steps in to help reduce the burden that the uncertainty of research and development spending creates. The credit is non-refundable, which means businesses won't be getting cashback for their investment into the future.

It saves money for the qualified business by reducing its taxable income. Yes, there are limitations on the amount of a deduction a business can take each year, but that deduction can be carried backwards to reduce one previous year's taxable income and carried forward up to 20 years!

Who and What is Eligible for the R&D Credit?

Even when a business is aware of the credit, many don't believe they are eligible to receive it. After all, research and development means laboratories, test tubes, and scientists, right? Not exactly. The federal government's guidelines for what meets their criteria for research and development is much wider than many realize.

The credit is tied to innovation, and innovation is defined by the Merriam-Webster dictionary as,

"a new idea, device, or method; the act or process of introducing new ideas, devices, or methods."

It's not just new though, it's also improvements to existing ideas, devices, and methods. So, as you may guess, that truly leaves the deck wide open for businesses!

Also, in the case of this business tax credit, size doesn't matter; big and small businesses alike qualify for the credit. Sadly, only one of every twenty small and medium sized companies that are eligible take advantage of the credit.

Remember, this credit was made permanent in the recent tax extender signed by President Obama, so it's not going away anytime soon! If you own a small business or know someone who owns a small business, apply for this credit or encourage them to do so. This option has the ability help American companies grow, and for businesses that left the U.S., this provides more than enough incentive to reshore.

Looking for more technical information on the R&D credit? Check out the IRS Research and Development Manufacturing Tax Tips

References

Karnis, D. (2010, February 28). Navigating the R&D Tax Credit. Retrieved from Journal of Accountancy.

Siegel, M. (2016, February 1). The New and Improved R&D Tax Credit: The Tax Deal Manufacturers Will Be Celebrating for Years to Come. Retrieved from IndustryWeek.