There’s never been a better time to claim R&D tax credits in the US: Here’s why

At $10 billion annually, the U.S R&D credit is the largest tax credit out there for businesses based in the United States. If your business operations fall within the criteria of developing new or improving existing technologies, products, or materials, then this credit can offset your payroll taxes by up to $250K per year.

And yet, this particular piece of legislation hasn’t always been so robust — an unfortunate quality that’s worked to deter businesses in the past from trying to claim the credit. Below, we give a brief outline of the R&D tax credit, its history, and the recent changes that have made it more accessible than ever before:

Let’s take it back to 1981

In 1981, Congress passed the Economic Recovery Tax Act (ERTA) to encourage investment within the U.S., function as an economic stimulus, and encourage American competitiveness in the global marketplace. The R&D tax credit — then formally known as the “Credit for Increasing Research Activities” — was included in the ERTA, with the intent to incentivize private firms to conduct research.

Though popular from its inception, the status of the R&D credit fluctuated frequently over the past three decades, with Congress having to extend it on a temporary basis a total of 16 times. From time to time the credit would expire, and it would sometimes remain expired for up to a year before it was once again extended. Needless to say, no competent business could truly account for this credit in their long-term budgeting forecasts, thanks to its volatile status.

2015 brings permanent change

Under the Obama administration, a full 35 years after its original creation, the R&D tax credit was made permanent under the Protecting Americans from Tax Hikes (PATH) Act of 2015.

With this newfound permanence, businesses are now free to take the R&D tax credit into account when forecasting for the future.

Based out of Canada? Check out our SR&ED Webinar on audit-proofing your SR&ED claims.

Positive change for SMBs

In the past, it was often difficult for small- and medium-sized businesses to claim the R&D tax credit thanks to the alternative minimum tax (AMT) bar, which essentially served as a barrier to prevent owners of pass-through entities from using the R&D credit to reduce their taxes below their tentative minimum tax (TMT).

However, this aspect of the tax credit was also altered for the better under the PATH Act. Starting in 2016, “eligible small businesses” (defined as businesses with less than $50 million in average gross receipts for the prior three years) that would otherwise qualify for the R&D tax credit can bypass the AMT bar.

The R&D tax credit now

While “R&D” might bring to mind white coats and the kind of work done in a lab, the reality is that any business with research and development efforts that can pass the following four-part test is eligible:

  1. New or improved business component: the work must be done to develop a new or improved product or process.
  2. Technological uncertainty: the work must be done in order to resolve technological uncertainty. A technological uncertainty exists if publicly available information and knowledge cannot be applied to achieve the desired result
  3. Systematic process: the work must be done in a systematic process to evaluate one or more alternatives to achieve the desired result
  4. Technological in nature: the work must be within the physical or biological sciences, engineering or computer science

Want to learn more about optimizing your R&D tax credit? Join our August 9 webinar with expert R&D firm Boast Capital.

Regina Mullen
ABOUT THE AUTHOR
Regina Mullen
Regina is the Workforce Management Expert & Content Marketing Associate for Replicon. Replicon provides award-winning products that make it easy to manage your workforce. With complete solution sets for client billing, project costing, and time and attendance management, Replicon enables the capture, administration, and optimization of your most underutilized and important asset: time.
Get started today.
Set up a free trial based on your business needs. Start Free Trial

Make Time and Attendance Part Of Your Digital Transformation

TLNT | October 10, 2019 By Raj Narayanaswamy, Co-founder and co-CEO at Replicon Many businesses embarking on a payroll and HR transformation journey can easily get caught up in the…Read More

Global Compliance Desk – Australia

Recent Federal Court Decision: Accrual of Personal/Carer’s Leave Most employers in Australia follow the practice of calculating personal/carer's leave entitlements in hours. On 21 August 2019, the Federal Court of…Read More

Project management, all grown up

accountingToday | September 17, 2019 By Scott Bales Vice president, Enterprise Solution Engineering and Delivery, Replicon One might assume they already know everything a project manager in a professional services…Read More

5 ways to improve service delivery in your organization

In a highly competitive market, service-based businesses need to capitalize on any opportunity to set themselves apart from their (often very similar) competitors. While implementation, system details, and service management…Read More

Demystifying the millennial workforce: 5 tips from Trunk Club’s Andrew Anderson Devine

Time magazine labels the millennial generation the “most threatening and exciting generation,” infamous for “narcissism [and] its effect: entitlement.” In the workplace, the perception of the millennial workforce is no…Read More

Common pitfalls in professional services organizations & how to avoid them (1/3)

The professional services organization (PSO) landscape is changing -- employees are harder to recruit and retain, a globalized marketplace increases competition for clients, clients want more for less, and management…Read More
  • Cloud
  • In The News
  • Corporate
  • Professional Services Management
  • Project and Program Management
  • Shared Services Management
  • Time and Attendance Management
  • Workforce Management
  • Customer Feature
  • Feature Update
  • Time Intelligence
  • Industry News
  • Webinar Recap
  • Global Compliance Updates
  • Chat with us
    How can we help you?