Insights: Article

R&D Tax Incentive Frequently Asked Questions

December 25, 2016

What are research expenditures?
Research (or R&D) expenditures that qualify for R&D tax incentives include wages paid for technical, support, or supervision personnel, supply expenses for materials used in the R&D activities, and outside contractor costs for third parties assisting with R&D activities.

What are tax credits?
Business tax credits are generally government incentives to encourage / reward certain types of activities.  Tax credits can generally be used to reduce your tax liability on a dollar-for-dollar basis and are often claimed in addition to the deduction for the expenses that generate the credit.

How do I apply for a tax credit?
Different tax credits have different application requirements.  There is no formal “application” for the federal R&D credit; the credit is simply claimed by filing a form on your original or amended return to claim the credit.

Are there specific R & D tax credit Rules?
Yes, the R&D tax credit has various rules / criteria that need to be met to qualify for the credit.  For example, the definition of a “qualified activity” includes a set of criteria outlined in the tax code that must be met in order for the associated costs to be eligible for the credit.  The R&D credit also involves a number of computation rules that must be followed to properly compute / claim the credits.

What is Section 41?
Section 41 is the section of the internal revenue code that allows for the R&D credit and provides the various definitions / rules for claiming the credit.  The IRS has also issued various regulations that provide further guidance on the credit.

What are the R & D tax credit qualification rules?
At a high level, in order to qualify for the credit, a taxpayer must be trying to develop something new or improved, where some kind of technical design uncertainty exists, and where an iterative process of design and testing is in place to evaluate different design alternatives.  Activities related to product development / improvement, manufacturing process development / improvement, or software development / enhancement typically meet the qualification criteria for the credit.

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