The federal R&D tax credit has been a part of the tax code since 1981, rewarding businesses in a wide variety of industries for making improvements to their products, processes, or techniques.  The credit is designed to encourage the American industry to invest in research and development activities including but not limited to design, development, engineering, experimentation, trial and error, process improvement, software development and improvement, quality assurance and more. This wage based credit is intended to stimulate R&D activities among businesses through tax incentives.

The federal credit (and the 43 state versions of the credit that have risen over the years) essentially reward those companies that are thinking bigger and better about their products or services, providing valuable tax credits for their R&D investment. Currently, the R&D tax credit and other related tax breaks save U.S. businesses more than $12 billion a year, as noted in the Washington Post.

Certainly an impressive figure—and one that would be even larger if all eligible businesses in all qualified industries actually applied for the credit. The R&D credit is one of the most overlooked opportunities afforded to U.S. businesses, with the vast majority of eligible companies (and, in many instances, their CPAs) self-censoring away from the credit.

Anytime a business makes changes to the design or development process to make it cheaper, greener, cleaner, better, and quicker, the business could be earning tax credits. This tax credit can be applied to both new product development as well as the production side of manufacturing, software development, fabrication, machine shops, agriculture, architecture, biotechnology, as well as a broad range of other industries. These dollar for dollar credits can make a positive impact on your bottom line.

Our financial tax team has vast experience in structuring these credits for our clients.

We Have found that many companies regard their own efforts to make new, lighter, stronger, cheaper, more reliable products as “just doing my job,” when in fact they have been performing R&D qualifying activities all along.

If your company is involved in any of the following activities, you may be able to claim the R&D tax credit.

• Developing an innovative product that is new to the market
• Engineering and designing a new product
• Research aimed at discovering new knowledge
• Searching for ways to apply new research findings
• Designing product alternatives
• Evaluating product alternatives
• Significant modifications to the concept or design of a product
• Designing, constructing, and testing preproduction prototypes and models
• Engineering activity to advance the product’s design to the point of manufacture
• Systems processing modeling
• System and functional requirements analysis Integration analysis Experimenting with new technologies
• Experimenting with new material and integrating the material to improve manufactured products
• Developing new production processes during prototyping and preproduction phases
• Research aimed to significantly cut a product’s time-to-market
• Research aimed to obtain more efficient designs
• Developing and modifying research methods / formulations / products
• Paying outside consultants / contractors to do any of the above activities
• Engineering to evaluate new or improved specification/modifications in terms of performance, reliability, quality, and durability.

The R&D tax credit rewards companies for the exact activities that drive our economy forward = be it the development of new technologies or the enhancement of existing ones that improve efficiencies, solve real-world challenges and improve our overall quality of life. These are the types of behaviors we need from the private sector to remain competitive, and now is the time for us to further strengthen our various federal and state R&D tax incentives and put them on par with other first world nations.

Rapid changes in technology over the past decades have forced most companies to constantly innovate. At every state, companies encounter technical challenges related to developing new or improved products and trade processes and integrating them with existing assets. Being able to overcome these technical hurdles is critical to maintaining a successful, healthy business.

Companies that are involved in developing new or improved products, processes, techniques, formulas, and inventions are often eligible for the R&D tax credit, saving them money that can be reinvested to help develop and grow their business rather than paid to the IRS or state governments.

As long as there is a development or improvement to a product which involves the elimination of uncertainty via an experimental process, it’s now qualified R&D. The key word is “experimentation.” If there is no uncertainty about what you are doing, it won’t qualify.

Think in terms of new techniques, formulas, processes, software, testing out new building materials, and the design of any new projects, such as those involving mechanical and electrical systems.

Many companies recognize only core engineering employees as engaging in qualified activities, but there is a wide variety of direct supervisory roles that are also eligible for the tax credit.

If a company is building a new medical device, the scientists and engineers developing the product’s core design and functionalities are clearly performing qualified R&D activities. From there, a prototype must be built with the assistance of the company’s production and fabrication personnel. Those individuals and activities may be considered the direct support of R&D. Lastly, assume one of the company’s senior engineers oversees the process from a technical standpoint and report the findings to management. Those activities can equally qualify for the credit as the direct supervision of R&D.

The definition of direct supervision isn’t always straightforward. The engineers who perform qualified research, for example, are sometimes given technical direction by their direct supervisors. In such instances, both the direct research and its direct supervision qualify for the tax credit.

Working on a new business proposal? That work is qualified, even if you don’t get the business. Manufacturing another size of an existing product, or making changes to use a new material? Qualified. Retooling machinery to improve the manufacturing of an existing product? Qualified.

Qualifies R&D services also include direct support of research activities – in other words, services that directly support the people conducting qualified research. Qualified direct support could include activities like a machinist machining a part of an experimental model used in qualified research or an employee typing reports describing laboratory results derived from qualified research.

Growing a business eventually requires developing new products, technologies, systems and sometimes even industries. This growth is vital not only to the success of your individual company but also to the success of the overall economy, which needs innovation to continue growing.

However, innovation requires expensive research and development. In many cases, attempts at innovation fail, with no return on investment, or require multiple states of development before becoming profitable. These costs can discourage businesses from investing in research and development. This is especially true for small businesses, which do not have the resources and cash flow that large corporations do.

That’s where the R&D tax credit can help your business.