What is the R&D Credit?

The R&D tax credit is a tax incentive provided by the US to incentive businesses to invest in research and
development activities. It is designed to promote innovation and technological advancement by reducing
the tax burden on companies that are engaging in qualified research activities.

What makes
a company eligible for the
R&D tax credit?

Only qualified R&D activities are eligible for tax credit, which must pass the IRS’s 4-part test:

  • The activities must result in the development of a new or improved business component, such as a product, process, formula, invention, software, or technique to improve the functionality, performance, reliability, or quality.
  • The research activities must involve a technological uncertainty that the company is seeking to resolve through a process of experimentation.
  • The company must use a process of experimentation aimed at resolving the technical uncertainty
  • Trial and Error
  • Prototyping
  • Evaluating alternatives
  • Modeling and simulation efforts.
  • The research must rely on principles of physical or biological sciences, engineering, or computer science.

What Industries Qualify?

Industry Examples of Qualified Activities
Manufacturing
Product development, process improvements, quality enhancements
Automotive
Designing and improving vehicle components, developing advanced safety features
Aerospace
Developing new aircraft technologies, improving aerospace systems
Electronics
Designing and improving electronic devices, developing innovative circuitry
Pharmaceuticals
Drug discovery, clinical trials, formulation development
Food Processing
Developing new food products, improving production processes
Software Development
Developing new software, enhancing functionality, algorithm development
Information Technology (IT)
Designing and developing innovative IT solutions, software architecture
Engineering
Creating new designs, developing prototypes, finding innovative solutions to technical challenges
Architecture
Innovative design solutions, sustainable building techniques
Construction
Developing new construction methods, optimizing building systems
Biotechnology
Genetic research, bioprocess development, medical device innovation
Life Sciences
Biological research, medical device development, clinical research
Chemicals
Developing new chemical compounds, improving manufacturing processes
Material Sciences
Developing new materials, improving material properties

What are the benefits?

  • Tax Savings: The R&D tax credit provides a dollar-for-dollar reduction in a company's tax liability, resulting in direct tax savings.
  • Startups and Small Businesses: Eligible startups and small businesses can use the R&D tax credit to offset payroll taxes, providing additional financial support for growth and expansion.
  • Cost Recovery: The credit helps companies recover a portion of their research and development expenses, reducing the overall financial burden of innovation.
  • Supports Job Creation: The R&D tax credit promotes job creation and retention within the United States, as companies invest in research activities that require skilled labor.
  • Competitive Advantage: Access to the R&D tax credit can give companies a competitive edge by allowing them to allocate more resources to research and development, leading to innovation and market differentiation.
  • Encourages Innovation: By reducing the cost of research and development, the credit encourages businesses to invest in innovation, fostering technological advancements and competitiveness.

How Finvisor can help?

  • Financial Analysis: Analyze the company's eligible research expenses, including wages, supplies, computer lease, and contract research costs, to determine the potential tax credit amount.
  • Technical Analysis: Conduct a technical analysis of the company's research activities to identify qualifying activities and expenditures. This involves evaluating the technical uncertainties, experimentation processes, and technological advancements achieved.
  • Calculation and Optimization: Calculate the R&D tax credit using the appropriate methodology and optimize the claim to maximize the available credit.
  • Compliance and Reporting: Assist in complying with IRS guidelines and regulations for claiming the R&D tax credit. Prepare the necessary tax forms and documentation, such as Form 6765, to support the claim.
  • Documentation Gathering: Assist in collecting and organizing the necessary documentation to support the R&D tax credit claim. This may include project plans, design documents, test results, payroll records, and other relevant documentation.
  • Continuous Monitoring: Stay up-to-date with changes in R&D tax credit laws, regulations, and interpretations to ensure customers benefit from any new provisions or opportunities.
  • Collaboration with Tax Professionals: Work collaboratively with the customer's tax advisors or engage tax professionals to ensure accurate claim preparation and adherence to tax regulations.

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