Research & Experimentation Tax Credits

The Research and Experimentation Tax Credit rewards companies who invest resources in innovation and product and process improvements which help to expand our economy. 

The R&E tax credit has been in existence since 1981, but changes in regulations in 2001 and 2003 have allowed for additional activities to qualify as research activities. Consequently, many companies that were not eligible in the past may now claim this federal tax credit. Companies may also file amended tax returns to obtain refunds of previously paid income taxes, and in some cases, may be able to recapture taxes paid up to four years ago.

The R&E tax credit is a wage-based tax credit available for the development or improvement of products, processes, techniques, formulas, inventions or software. In addition to qualified wages, companies may capture supply costs for prototypes, as well as 65 percent of contracted labor spent performing qualified research on behalf of the company. Furthermore, several states offer a modified R&E tax credit, as well.

Companies can benefit by both deducting the research expenditures and by claiming the credit. While the research expenditures are a reduction of taxable income, the R&E tax credit is a general business credit, and a dollar-for-dollar reduction of tax.  Generally, companies must first use the credit to offset tax for the year the credit is generated, and if additional credit remains, the company may carry the credit back one previous tax year or forward to the next 20 years.  However, the recently enacted Small Business Jobs Act of 2010 allows research credits earned in 2010 by eligible small businesses to be carried back up to five previous tax years and forward for the next 20 tax years.

The Federal R&E tax credit expires periodically, and Congress historically renews the R&E tax credit after its expiration.  The current law allows taxpayers to claim Federal R&E tax credits for expenditures paid or incurred prior to December 31, 2011.  Taxpayers may amend Federal tax returns to claim R&E tax credits in prior years and establish systems to claim R&E tax credits in the future.

There are four basic requirements for research activities to qualify:

  1. Qualified research activities are defined as the development or improvement to a business component, which is defined as a product, process, technique, formula, invention or software.
  2. The research must be technological in nature. That is, the process of experimentation used to discover the information fundamentally relies upon the physical or biological sciences, engineering or computer science. Furthermore, companies may use existing technologies and may rely upon existing principles to satisfy this requirement.
  3. The research must be intended to eliminate uncertainty concerning the development or improvement of a business component. Uncertainty exists if the capability or method for developing the business component is unknown, or if the appropriate design of the business component is unknown.
  4. Elimination of the technical uncertainty must be accomplished through a process of experimentation, including systematic trial and error, modeling or simulation.

In a recent report by the United States Department of the Treasury entitled “Investing in U.S. Competitiveness: The Benefits of Enhancing the Research and Experimentation (R&E) Tax Credit”, dated March 25, 2011, it summarizes that the Administration’s proposal to enhance the Research & Experimentation tax credit will: 

  1. Leverage More Than $100 Billion in Domestic Private-Sector Research over the Next 10 Years
  2. Support Nearly 1 Million Research Workers in the U.S. in Professions that Pay Higher-Than-Average Wages; 
  3. Increase the Total Amount of the Credit by 20 Percent; 
  4. Increase Use of the Simpler Version of the Credit; and 
  5. Strengthen the Incentive Effect of the Credit by Providing Certainty to Taxpayers.

Further, President Barack Obama stated on September 8, 2010 that “Instead of tax loopholes that incentivize investment in overseas jobs, I’m proposing a more generous, permanent extension of the tax credit that goes to companies for all the research and innovation they do… right here in the United States of America.”

Documentation is the key to substantiating your R&E tax credit claim and choosing a service provider that has a dedicated group focused on this complex area of the tax code is essential. Our R&E Tax Credit Group specializes in assisting companies and their advisors with their claims. Our group professionals consists of engineers, CPAs and tax specialists, prior business owners of manufacturing companies, and technical writers. Our streamlined processes help to provide the highest quality service with the least amount of interruption to your operation.

Eligible Industries May Include:

  • Aerospace and Defense 
  • Agriculture and Farming 
  • Architectural and Engineering 
  • Boat Manufacturing 
  • Chemical Manufacturing 
  • Computer and Electronic Product Manufacturing
  • Construction
  • Custom Manufacturing 
  • Dental Laboratories 
  • Design-Build Contracting
  • Electrical Equipment and Component Manufacturing
  • Energy and Utilities
  • Food Processing
  • High Tech
  • Medical Device Manufacturing 
  • Metal Casting and Fabrication 
  • Oil and Gas 
  • Pharmaceutical and Biotech
  • Plastics and Rubber Manufacturing 
  • Software Development 
  • Tool and Die 
  • Transportation Equipment Manufacturing

Qualifying Activities May Include: 

  • Designing new products
  • Developing new, improved or more reliable products, processes or formulas 
  • Developing prototypes 
  • Design tools, jigs, molds or dies 
  • Developing or applying for patents 
  • Performing certification testing 
  • Conducting testing of new concepts and technology 
  • Developing or improving production or manufacturing processes 
  • Improving or building new manufacturing facilities 
  • Expending resources on outside consultants or contractors to do any of the above-stated activities
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For more information about R&E Tax Credits, please contact Doug Mueller, Adam Herman or Mike Devereux II at 314.862.2070. Or, e-mail mdevereux@muellerprost.com.