The R&D tax credit is an incentive the federal government provides to businesses to encourage them to engage in research and development activities. Businesses must meet certain criteria set forth by the Internal Revenue Service (IRS) to be eligible for these credits. Businesses can take advantage of the R&D tax credit if they engage in activities that involve creating new or improved products, processes, techniques, formulas, inventions, and software. Additionally, businesses must be able to demonstrate their activity seeks to advance the overall knowledge or capability within a particular industry. In other words, the R&D activity needs to have some level of scientific inquiry, engineering, or experimental activities. Businesses such as manufacturers, software developers (technology), architects, and engineers are commonly eligible for these credits. However, other businesses may also qualify depending on their activities and operations.
Technology companies engage in a wide variety of R&D activities that can qualify for credits. Examples include creating or improving software applications or algorithm-based solutions, designing, testing, and building new hardware components and products, developing new technologies or processes to increase efficiency, researching new methods to reduce product costs, and more.
Manufacturing companies are among the most eligible businesses for the R&D tax credit. Generally, their operations usually involve increasing efficiency and reducing costs. Examples of qualified activities for manufacturers include creating new processes or technologies to improve efficiency, testing products and components to ensure quality and safety, developing new methods or techniques to reduce costs, improving existing products or components, and more.
Architects and engineers also qualify for credits if they engage in activities that involve creating new products or processes or making improvements to existing ones. Examples include designing structures and systems, researching materials and methods to improve their design, and developing new techniques to reduce costs or increase efficiency.
Ultimately, any business that engages in R&D activities can potentially benefit from R&D tax credits. Businesses should consult with a qualified advisor who can review their operations and assess whether they qualify for tax credits based on their activities. The R&D tax credit provides businesses material non-dilutive capital that improves their cash flow by reducing their out-of-pocket payroll or income taxes.