Everything You Need to Know about the R&D Tax Credit

What if we told you that the Research and Development Tax Credit is not just for scientists?

The credit is much more expansive than many business owners realize, with qualifying companies coming from numerous industries. Organizations that invest in qualified research and development activities that incentivize innovation and growth are eligible for general business tax credits. 

Now, what qualifies as research and development activities?

R&D Tax Credit Qualifications

  • Permitted Purpose

Activities related to improving the functionality, performance, reliability, or quality of a product, process, software, technique, invention, or formula that is intended to be used in your business or held for sale, lease, or license.

  • Technological in Nature

A business’s activities must be based on a hard science such as engineering, physics, chemistry, or biological and computer sciences.

  • Elimination of Uncertainty

From the start, the business must have faced technological uncertainty when designing and developing the component.

  • Process of Experimentation

The business must have considered multiple alternatives through a fair trial and error approach.

If your company does any of the following, you most likely qualify to receive the R&D Tax Credit.

  • Develop of design new products or processes
  • Enhance existing products or processes
  • Develop or improve up existing products, prototypes, and software

How Does the R&D Tax Credit Work?

We usually find that anywhere from 6-8% of a company’s annual qualifying R&D expenses can be applied dollar for dollar, against its federal income tax liability. 

Businesses can claim an R&D Tax Credit of up to $250,000 per year against their payroll taxes. Eligible businesses must have less than $5 million in gross receipts in the current year, and no more than 5 years of generating gross receipts, including the current year. 

New businesses, on the other hand, can offset payroll taxes for up to five years, with a maximum of $1.25 million in total credits used on their quarterly payroll tax returns.

Businesses can claim the R&D credit retroactively by filing amended returns for any open tax years, which is typically 3 years. 

How To Claim the R&D Tax Credit

In order to claim the R&D Tax Credit, all you need to do is fill out IRS Form 6765, Credit for Increasing Research Activities.

  • Section A: is used to claim the regular credit and has eight lines of required information (lines 1,2,3,7,8,10,11 and17).
  • Section B: applies to the alternative simplified credit (ASC).
  • Section C: identifies additional forms and schedules that warrant reporting based on the business structure.
  • Section D: is only required for qualified small businesses (QSBs) making a payroll tax election.

If you’d like to learn more about how your business can take advantage of the R&D Tax Credit, contact us today to schedule a FREE virtual consultation.

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