What is the R&D Tax Credit?
Congress enacted the Credit for Increasing Research Activities (also known as “R&D" Tax Credit,” “Research Tax Credit,” “the Research Credit,” “the R&E Tax Credit”) in 1981. Congress recognized, for the United States to remain competitive in an increasingly global marketplace, a tax incentive would be of great value to domestic companies. Congress has reaffirmed their support for the tax credit many times over the past four decades, stating that technological advancements and innovations achieved through research and experimentation are vital to the strength, sustainability, and overall well-being of the American economy, citing tax incentives for research and experimental spending must remain a fundamental tenet of America’s global competitive strategy.
The R&D tax credit is a dollar-for-dollar reduction of Federal taxes owed.
What does this mean for your company?
By reducing your company's tax liability, reallocated tax dollars can be used to further pursue R&D qualified activities, and positively impact your bottom line. This is the core purpose of the tax credit, to encourage domestic companies to innovate and drive the US economy forward.
From the 2012 American Taxpayer Relief Act legislation, "Congress acknowledges that research is important to the economy. Research is the basis of new products, new services, new industries, and new jobs for the domestic economy. There can be cases where an individual business may not find it profitable to invest in research as much as it otherwise might because it is difficult to capture the full benefits from the research and prevent such benefits from being used by competitors. At the same time, the research may create great benefits that spill over to society at large. To encourage activities that will result in these spillover benefits to society at large, the government does act to promote research."
Many of the states also have a similar incentive to that of the federal research credit. The credit can be claimed on the current year's return as well as prior tax years open by statute (generally prior 3 years).
