In the highly competitive aerospace and defense industry, innovation is not just an advantage—it’s a necessity. Advancements in technology, safety, and efficiency are driving aerospace and defense companies to invest heavily in research and development (R&D). However, the costs of innovation are steep, often requiring significant resource allocation, advanced technical expertise, and lengthy development cycles. To support these companies in meeting both commercial and strategic goals, the U.S. federal government, along with many states, offers R&D tax credits for aerospace and defense designed to offset a portion of these expenses, enabling companies to reinvest in further innovation.
What are R&D tax credits? The R&D tax credit is a government incentive designed to reward companies across industries that develop new or improved products, processes, and technologies. For aerospace and defense companies, this can encompass a wide range of activities, from designing lighter, more fuel-efficient aircraft to creating advanced materials and manufacturing processes that withstand extreme conditions.
R&D tax credits provide a dollar-for-dollar reduction in tax liability, making them one of the most powerful tools available to offset the financial burden of R&D activities. These credits can significantly impact a company’s bottom line, allowing for reinvestment in additional research, infrastructure, and talent to drive further growth.
Key Areas of Innovation: Aerospace and defense companies are at the forefront of technological innovation, often pushing the limits of what’s possible. Some of the key R&D areas eligible for tax credits include:
Notably, credits are applicable across a wide range of industries. Beyond R&D tax credits for aerospace and defense, industries ranging from agriculture, consumer packaged goods, manufacturing, and medical devices to energy and technology also benefit from these credits. For example, agriculture, consumer packaged goods, manufacturing, device companies may qualify for R&D tax credits through activities related to new product development, process optimization, and material innovation. Whereas in energy, activities like improving renewable technologies or developing more efficient delivery and storage solutions can qualify, while technology firms may claim credits for advancements in software development or hardware improvements. Each industry has its unique set of qualifying activities, making R&D tax credits a valuable tool for businesses in virtually any sector striving for innovation and growth.
What expenses are eligible? Expenses that qualify for R&D tax credits include wages for employees directly involved in qualified research or its supervision, supplies used in the research process (excluding general administrative costs and depreciable property), cloud computing expenses for research purposes (such as hosting services provided by AWS or Microsoft Azure), and payments for contract research performed by third parties on behalf of the company.
How are credits claimed? To claim federal R&D tax credits, companies need to file Form 6765 along with their income tax return. They must maintain documentation to support the information provided on this form, including financial records related to wages, supplies, and contract research, as well as project documentation that demonstrates the qualified nature of the research.
What about state R&D tax credits? In addition to federal R&D tax credits, many states offer their own R&D tax incentives. Most of these state credits align with federal guidelines but may have unique application processes and specific deadlines. Companies claiming state R&D tax credits must be aware of each state’s requirements and timelines to ensure they do not miss out on potential benefits. As with federal credits, maintaining thorough documentation is crucial.
Navigating the complexities of R&D tax credits can be transformative for businesses aiming to innovate and grow. By understanding and leveraging these credits, companies can substantially lower their tax liabilities and reinvest savings into future research and development initiatives. This is crucial in any industry where ongoing innovation is key to maintaining a competitive edge. From detailed calculations to comprehensive documentation, the process can be intricate, but the potential rewards are substantial. Earnd specializes in simplifying this process, providing expert guidance and support to help businesses claim R&D tax credits effectively. Contact Earnd at START TODAY to access valuable expertise, allowing you to focus on advancing your innovations and achieving long-term success.