The Research and Experimentation Tax Credit Helps Spur Entrepreneurial Growth

Calendar Icon Updated January 15, 2019
Tax Credits

The best way to maintain a healthy business is to keep growing, changing and adding new products and services to the mix. Sometimes, this is a natural extension of a proven business plan, other times, especially in highly technical or manufacturing operations, the amount of time, effort and money to bring something new to the market is significant.

To assist companies with their Research and Development cost issues, tax credits such as the State and Federal Research and Experimentation Tax Credits are available. By driving down tax rates and helping to generate more cash flow, businesses can remain healthy during the critical (and oftentimes extended) research and development period. These credits provide an extra incentive on top of any tax deductions that a business may take for R & D expenses. 

Research and Experimentation credits are flexible to the longer range needs of businesses as well. If a business does not have a tax liability in their current fiscal year, they can still claim an R & D tax credit and roll it to a year when taxes may be owed. In addition, there are some instances when a business might also be able to claim research credits for up to three prior open tax years.

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While research and development may conjure up a certain narrow definition in many business owners’ minds, the reality for Research and Experimentation Tax Credits is that they can extend across a broad spectrum of high tech, low tech, traditional or non-traditional businesses and industries. Credits are available for the development of new production processes, quality control efforts, sales, marketing, and information technology, among many others. 

To qualify for a tax credit, a business must pass a four-part test.

  • Permitted Purpose – the product or service must create something new or improve upon an existing business component.
  • Elimination of Uncertainty – There must be an intent to discover something that removes uncertainty surrounding the development or creation of a product.
  • Process of Experimentation – There must be a systematic approach to achieve a desired outcome that may or may not create a new system, product or service.
  • Technological in Nature – The experimentation must rely on processes found in the physical or biological sciences, engineering or computer sciences. 

To be eligible for the tax credit, a business must also be able to quantify eligible expenses, documenting wages, supplies, research, and other related costs. 

Eligibility Team

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