The Research & Development Tax Credit (R&D) program is a federal and California tax credit incentive (also available in most other states) and is designed to stimulate innovation within the United States and subsidize companies willing to innovate.
The R&D program allows companies to generate tax credits to reduce the taxes a company would have to pay. The R&D Credits are a dollar for dollar tax credit against federal and California taxes a company would or has paid. The R&D Credit was first introduced during 1981 and Fortune One Thousand companies have been claiming the R&D credits since the inception.
The Bush administration made significant changes to the R&D Credits creating opportunities for middle to small size companies to take advantage of the R&D Credit.
Companies are not limited to claiming the R&D credits on a timely filed tax return. The R&D credit can be claimed on an amended tax return going back three years for Federal and four years for California. The R&D credit can be claimed against taxes already paid and/or taxes expecting to be paid.
In order for a company to qualify for the credit two things must happen. First the company must have qualified R&D activities and second there must be an expense associated with those R&D activities.
Below in bullet point are types of R&D activities that qualify companies to generate the R&D Credits:
- New Product Development
- Improving Existing Products Functionality
- Establishing New or Improving Manufacturing Processes
- Developing Software for Manufacturing, Internal or External Use
Below is a flow chart of qualified R&D activities performed by a traditional manufacturing company and is not limited to just manufacturing. If your company is attempting any of the activities listed below then your company may generate R&D Credits:
