R&D Tax Credits: What It Is and How You Can Claim It


Today, millions of enterprises in the United States can claim tax credits for research and development. Businesses in the United States, regardless of size, can benefit from this form of tax return. Companies that invest in technology, in particular.

The trouble is that many businesses are still unaware of what R&D tax credits is, let alone how they might benefit from it.

In this post, you will discover how to calculate R&D tax credits and how to claim them in 2021. It is the perfect time to take advantage of this tax credit to assist in the expansion of your business.

First off, to know the purpose and function of R&D, it is necessary to define the term, examine its role in business, and consider its broader significance. This will enable us to discuss how R&D is funded, notably through the government’s robust R&D tax credits and incentives.

R&D Tax Credits: What is it?

The research and development tax credit is a non-refundable amount that taxpayers deduct from their total taxable income when they file their taxes.

This credit is specified in Section 41 of the Internal Revenue Code and is available to firms that incur expenditure associated with research and development. For instance, software companies that make significant investments in their technology.

Due to its simplicity, it is frequently referred to as an optional simplified credit.

As a result, it provides an incentive for enterprises to do research in their specific niches in order to develop new approaches to business challenges.

These activities also contribute to the development of new products.

This reimagined tax structure has a drastic impact on the technology companies in the United States, as it increases employment creation in that sector.

This type of tax law dates all the way back to 1981. However, businesses were hesitant to incorporate it into their long-term planning strategy due to its unreliability. Previously, this business tax was scheduled to expire at regular periods and would be renewed by Congress. Due to the uncertainty regarding the tax’s availability, it was viewed as an unwelcome complication to tax planning and a source of tax liability.

However, following tax reform in 2015, the Protecting Americans from Tax Hikes Act made R&D credits permanent (PATH).

As a result, it is also accessible to medium and small firms in the United States. So if you invest in technology for your business, you can benefit from it.

How R&D Tax Credits Work

Businesses that invest in developing new products, processes, or services or improving current ones qualify for R&D tax credits. If you invest in research and development, you can claim an R&D tax credit in exchange for a cash payment. The potential for recognizing R&D is enormous – indeed, it exists in every field. Additionally, if this is your first claim, you can generally claim R&D tax reduction for the previous two accounting periods that are already completed.

R&D Tax Credit: Requirements to Qualify

While firms can claim R&D tax credits, there are quite a handful of stringent eligibility restrictions.

Enterprises must meet the following three requirements in order to be eligible for this R&D tax credit:

  • The company must not be a tax-exempt organization as defined in section 501 of the Internal Revenue Code.
  • Additionally, it should have gross receipts or revenue that is less than $5 million for the tax year.
  • The company’s gross receipts cannot exceed the end of its five-year tax period. The end of that period corresponds to the fiscal year for which they are claiming the tax credit.

While small businesses benefit most from this tax credit, larger companies may also qualify for it if they meet the same qualifying conditions as small firms.

Calculating R&D Tax Credits

Prior to calculating the amount of R&D tax credit carryforward, you must establish that your business operates in the United States and pays taxes.

Then, you will need the following figures:

  • Employees in your firm as a whole
  • Revenue range of the business
  • Annual net R&D expenditures

These are some fundamental data that you will need to compute this tax rate.

You can then use a calculator for R&D tax credits that will help you establish the actual amount you can collect under this tax.

That being said, even if you do not have the specific figures for the tax codes indicated above, the calculator will provide answers as long as you enter some information in the fields.

However, it is recommended that you utilize this tool with realistic amounts for qualified research expenditures.

This way, you can acquire a feel for what to expect in a real-world situation.

R&D Tax Credits Strategy

It is insufficient to conduct R&D tax credits. To get the best out of a Research and Development role, one must need to strategize. Despite your R&D objectives, whether you seek a competitive advantage, a first-mover edge to capitalize on advanced technology, stay ahead of a rival, or enter a new market on how you prepare and strategize around R&D is critical.

A strategic R&D effort will yield rewards. It becomes considerably more lucrative when paired with R&D tax benefits. You may wish to alter your research and development methods and planning to minimize your R&D tax credits. The main objective is for research and development to permeate a company’s culture and business style.

The unpredictability inherent in the most valuable R&D initiatives can be financially minimized through the utilization of R&D tax credits. You can earn rewards for taking more calculated risks. This contributes to a shift in perspective when confronted with dangerous tasks. This is where sector specialists and certified tax advisers can assist. Tax experts are working closely with businesses to ensure they get the most out of their research and development.

Take Advantage of Your R&D Tax Credits

Understanding what a research and development tax credit is only half the battle.

If your business satisfies the conditions outlined above, the rest is a matter of being strategic about how you utilize this tax credit return.

And besides, qualified research investment does not have to be more expensive than necessary.

The best course of action is to integrate software to assist you in organizing your research and development tax charges in order to save your firm money.