Research and Development Tax Credit

Increase profitability and finance growth with R&D Tax Credits

Since its introduction in 1981, companies have used the Federal Research & Development Tax Credit to save billions of dollars. In addition to Federal R&D Tax Credits, many states also offer credits that follow the same guidelines as the federal credit. Because of this, the combined value of these credits provides an excellent means to increase profitability and fund strategic growth initiatives.

Purpose of the R&D Tax Credit

The purpose of the R&D Tax Credit is to help companies around the nation, and of all sizes, underwrite the cost of innovation. Although manufacturing, bioscience, software, and technology companies have historically reaped the greatest benefits from these credits, virtually any company that designs, develops, or improves a product or process may be eligible for this tax credit. This includes, but is not limited to, engineering, architecture, and construction companies.

Who Qualifies for the R&D Tax Credit?

The Research and Development Tax Credit was created in 1981 as an incentive for American innovation and was formalized in December of 2015. Any company that designs, develops, or improves products, processes, techniques, formulas, or software may be eligible. The terms Research and Development relate to the development of a product or process before commercial production for related U.S. activities. The Research and Development Tax Credit results in an immediate benefit to a company because it can reduce past, current, and future years’ federal tax liability, thereby creating an immediate source of cash. The credit provides a dollar-for-dollar offset against taxes owed or paid, which differs from a deduction. The credit can be used to offset Alternative Minimum Tax and payroll withholding in certain circumstances. The federal credit averages about 6.5% of combined qualified Research and Development labor, contractor labor, and supplies.

The R&D Tax Credit incentivizes certain research activities by reducing a company’s liabilities for spending money on that research. The credit is equal to a certain percentage of a business’ qualified research expense (QRE) in excess of a base amount. Expenses that qualify are more comprehensive than you may think — QREs can include the salaries of employees and supervisors who are conducting research as well as supplies, and even some of the research that is contracted out.

A simple four-part test helps to determine if your company’s activity qualified for the Research and Development Tax Credit.

  1. Elimination of Uncertainty: You must demonstrate that you’ve attempted to eliminate uncertainty about the development or improvement of a product or process. In other words, something that has been changed solely for aesthetic purposes would not qualify.
  2. Process of Experimentation: You must demonstrate — through modeling, simulation, systematic trial and error or other methods — that you’ve evaluated alternatives for achieving the desired result.
  3. Technological in Nature (The Discovering Technological Information Test): The process of experimentation must rely on the hard sciences, such as engineering, physics, chemistry, biology or computer science.
  4. Qualified Purpose (The Business Component Test): The purpose of the research must be to create a new or improved product or process, resulting in increased performance, function, reliability or quality.

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