When most people think of research and development, they likely envision research performed to discover new products or technologies. However, the Internal Revenue Service (IRS) has a much broader definition of the Research and Development (R&D) Tax Credit, defining it as “qualified research” which is technological in nature and in which the application is intended to be useful in the development of a new or improved business component.
Originally established in 1981, the R&D Tax Credit is available to a wide-ranging number of taxpayers, many of whom might not realize they qualify for the tax credit due to the obscurity of the IRS definition. As a result, many fail to claim these credits on their tax returns. Generally, tax credits add more financial value, making them preferable to taking a tax deduction.
IRS Code Section 41, the credit for increasing research activities, governs the R&D Tax Credit. Section 41(d) qualifies research in this manner:
- activities that create a new or improved function,
- activities that improve performance, and
- activities that improve reliability or quality.
Based upon the above conditions, taxpayers who actively work to improve their production processes of existing products qualify. This means the R&D credit is available to an extensive range of additional taxpayers.
The potential credit is based upon “qualified research expenses,” which Section 41 defines as follows:
- in-house research expenses, such as wages supplies used in the research, and
- contract research expenses.
Of course, the taxpayer must have the appropriate documentation to support their calculations in order to claim the R&D tax credit.
Anyone looking for more information regarding the R&D tax credit or a better understanding of how to qualify, may contact Spiegel.
Author, Chris Ricker, CPA
Director of Tax
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.