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  • Writer's pictureGary Marx

Increasing Cash Reserves with the Research and Development Credit

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The federal Research and Development ("R&D") credit is an incentive program every U.S. company should consider for a potential refund of federal taxes paid in open tax years and reduction of federal tax liability in future years.

The Economic Recovery Tax Act of 1981 created the R&D credit to incentivize U.S. companies to conduct R&D activities in the United States. The incentive is an incremental credit based on increased spending on business activity qualifying as R&D over the previous year. The most common eligible expense is the wages paid to employees while conducting qualifying R&D activities.

What Activities Qualify?

Many senior executives and business owners believe the R&D credit is available only to large life sciences and advanced technology companies conducting experiments in laboratories. The reality is that almost anyone making or improving a product, process, or service may be engaging in eligible R&D activities. Think of companies' actions to stay ahead of competitors, such as increasing longevity, reliability, speed, strength, technology, and reducing excess raw material.

Industries that Qualify for R&D Credits

A few of the many industries that qualify include:

  • Construction

  • Financial Services

  • Food Processing

  • Healthcare

  • Manufacturing

  • Medical Devices

  • Professional Services

  • Software

  • Technology

Legislative Actions Impacting R&D

Several legislative actions have made the R&D credit available to a greater universe of employers:

  • After years of Congress offering short-term extensions to the program, the Path Act of 2015 extended the R&D credit permanently,

  • The Path Act also allows new businesses with no federal tax liability and gross receipts of less than $5 million to take the credit against FICA payroll taxes, and

  • The Tax Cuts and Jobs Act ("TCJA") of 2017 repealed the Alternative Minimum Tax ("AMT"), resulting in a larger universe of smaller companies becoming eligible to pursue the credit and reinvest funding into their business.

State R&D Credits

An added benefit is that close to 40 states offer similar state-level R&D credits. Many states allow a taxpayer the ability to "sell" the credit if the company has minimal or no state tax liability.


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