The Research & Development (R&D) Tax Credit

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in the back room, with employees wearing white gowns, employing Bunsen burners, and resembling Albert Einstein is quite out of date.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.

• R&D Tax Credit Four Part Test for qualifying Activities
• Costs that Qualify for the R&D Tax Credit

The intent of the R&D tax credits when they were first introduced in the early 1980's was to encourage U.S. businesses to invest in the development of new and improved products in order to help them keep up with foreign competition. That goal is of even more importance in today's world. The R&D credit can help businesses offset their research and development expenses by 20% or more, depending upon the state in which they operate. Additionally, it may be possible to apply for credits for the past three open tax years and even closed tax years in specific situations.