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There’s never been a better time to claim R&D tax credits in the US: Here’s why

[Written for Replicon Blog]

At $10 billion annually, the U.S R&D credit is the largest tax credit out there for businesses based in the United States. If your business operations fall within the criteria of developing new or improving existing technologies, products, or materials, then this credit can offset your payroll taxes by up to $250K per year.

And yet, this particular piece of legislation hasn’t always been so robust — an unfortunate quality that’s worked to deter businesses in the past from trying to claim the credit. Below, we give a brief outline of the R&D tax credit, its history, and the recent changes that have made it more accessible than ever before:

Let’s take it back to 1981

In 1981, Congress passed the Economic Recovery Tax Act (ERTA) to encourage investment within the U.S., function as an economic stimulus, and encourage American competitiveness in the global marketplace. The R&D tax credit — then formally known as the “Credit for Increasing Research Activities” — was included in the ERTA, with the intent to incentivize private firms to conduct research.

Though popular from its inception, the status of the R&D credit fluctuated frequently over the past three decades, with Congress having to extend it on a temporary basis a total of 16 times. From time to time the credit would expire, and it would sometimes remain expired for up to a year before it was once again extended. Needless to say, no competent business could truly account for this credit in their long-term budgeting forecasts, thanks to its volatile status.

2015 brings permanent change

Under the Obama administration, a full 35 years after its original creation, the R&D tax credit was made permanent under the Protecting Americans from Tax Hikes (PATH) Act of 2015.

With this newfound permanence, businesses are now free to take the R&D tax credit into account when forecasting for the future.

Based out of Canada? Check out our SR&ED Webinar on audit-proofing your SR&ED claims.

Positive change for SMBs

In the past, it was often difficult for small- and medium-sized businesses to claim the R&D tax credit thanks to the alternative minimum tax (AMT) bar, which essentially served as a barrier to prevent owners of pass-through entities from using the R&D credit to reduce their taxes below their tentative minimum tax (TMT).

However, this aspect of the tax credit was also altered for the better under the PATH Act. Starting in 2016, “eligible small businesses” (defined as businesses with less than $50 million in average gross receipts for the prior three years) that would otherwise qualify for the R&D tax credit can bypass the AMT bar.

The R&D tax credit now

While “R&D” might bring to mind white coats and the kind of work done in a lab, the reality is that any business with research and development efforts that can pass the following four-part test is eligible:

  1. New or improved business component: the work must be done to develop a new or improved product or process.
  2. Technological uncertainty: the work must be done in order to resolve technological uncertainty. A technological uncertainty exists if publicly available information and knowledge cannot be applied to achieve the desired result
  3. Systematic process: the work must be done in a systematic process to evaluate one or more alternatives to achieve the desired result
  4. Technological in nature: the work must be within the physical or biological sciences, engineering or computer science

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