The federal government implemented the Research and Experimentation tax credits in 1981 to create jobs and spur technology in the U.S. Known as R&D tax credits, the program was meant to be a temporary measure to give the economy a boost. The R&D credit originally pertained to basic research expenses, such as those occurring in a laboratory setting. Subsequent modifications simplified the credit and made it available to a much wider variety of activities and industries.
Given the popularity of the R&D tax credit program, many states followed suit by establishing their own programs. Today, more than 40 states offer R&D credits with attractive features and additional advantages.
PATH to Permanent Tax Incentives
Over the years, the R&D credit was extended by Congress more than a dozen times until the Protecting Americans from Tax Hikes (PATH) Act of 2015 made the R&D tax credit permanent. In addition to making this valuable tax credit permanent, PATH added two additional features to the tax credit program that expanded the benefits for certain businesses, including startups and pass-through entities.
Depending on your company’s tax return filing deadline, it may be eligible to claim the federal R&D tax credit for the prior three years, and the state credit for the prior four years.
The permanent extension of the R&D credit is a great wake-up call for those in industries ranging from manufacturing, construction and software development to aerospace, high-tech, biopharmaceuticals and others to sit up and take notice of their eligibility to apply for the tax credits.
The Opportunity
Think of it this way—the intent behind the R&D tax credit program is to encourage innovation in the U.S.; the type of entity itself doesn’t matter as much. A job shop fabricating metal parts is just as likely to qualify as a scientist in a medical lab. The U.S. Tax Court and other courts have ruled in favor of activities that make things faster, better, greener and more efficient. This applies to the contractor who has used innovative construction materials to create more reliable, energy-efficient structures and the manufacturer who has used new technology to improve the efficiency of a production process.
Curious about R&D tax credits? Download your free guide here.
For more information or to request a free assessment to determine your company’s qualifying R&D tax credit eligibility, please contact Dennis Murphy, Jr., CPA, CCA, at 440-605-7124 or dmurphy@skodaminotti.com.
