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Overview of the Research & Development (R&D) Tax Credit

The R&D Credit has been part of the Internal Revenue Code since 1981; however, a large number of companies have not taken advantage of this provision. In the past, the rules were very confusing. It was hard to determine who qualified, let alone which products or processes might qualify. While the rules are still complex, a company may be able to claim the credit providing that they are conducting research in the U.S.

Recent federal rules have helped to clarify ways in which companies can qualify for research and development (R&D) tax credits, and have eased the associated reporting requirements. The old idea that you had to have a laboratory in the back room, with employees wearing white gowns, employing Bunsen burners, and resembling Albert Einstein is quite out of date.

The R&D tax credit is under-utilized simply because so many manufacturing companies don’t realize that the work they are doing to improve their product or improve the process by which they make their product qualifies for the R&D tax credit.  The perception that the record-keeping, burden of proof and manpower required to document these activities is too complicated and time-consuming for most businesses has been another major stumbling block.

In general you can’t tell what will qualify as Qualified Research Expenses without an in depth discussion about a company, however, the following activities likely fall under the category of Qualified Research Expenses:

  • Pre-production test runs
  • Testing new product concepts
  • Developing new technology
  • Trying new or different raw materials
  • Manufacturing products
  • Developing or improving production and/or manufacturing processes
  • Preparation of technical details of Requests for Proposal quotes
  • Prototype Development
  • Designing tools, jigs, molds, and dies
  • Modifying used or existing equipment
  • Developing, implementing or upgrading systems and/or software
  • Developing production control software
  • Automating internal processes

The amount of the credit will vary on a number of factors.  However, the credit can be claimed by the due date of a timely filed return and can even be claimed on prior tax years by filing amended returns. 

Let us do a no-cost analysis on your particular situation and see if it makes sense to pursue.  Contact our Tax Planning and Preparation Group by leaving a message below or by calling 440-449-6800.

This article is courtesy of Ron Antal, Managing Director of Research Credit Group.  You can reach Ron at 330-689-1778.

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