Protecting the bottom line is essential for long-term success in the ever-evolving business landscape. One often overlooked avenue for achieving this is leveraging available tax credits and incentives. The Research and Development (R&D) Tax Credit is the most powerful permanent tax credit available to businesses today to invest in innovation, ultimately strengthening their competitive edge.
However, claiming this credit can be complex and tedious without expert assistance. Businesses that invest in R&D and want to reduce their tax liability via the federal R&D tax credit must be able to show Qualified Research Activities (QRAs) and substantiate Qualified Research Expenses (QREs), but it’s not always easy to make sense of exactly what type of evidence and paperwork is needed. This article explores the key aspects of R&D tax credits, vital recordkeeping requirements, and examples of required documentation.
Understanding R&D Tax Credits
The R&D Tax Credit is a dollar-for-dollar credit that directly reduces the tax liability of a business for designing, developing, or improving products, processes, formulas, inventions, techniques, or software. It was designed to incentivize businesses to invest in innovation and technology and keep high-paying technical jobs within the US. This credit is available at the federal level and in almost 40 states, making it one of the most lucrative business incentives available to U.S. taxpayers.
Qualified Research Activities
To claim the R&D tax credit, a business must engage in “qualified research activities.” These activities typically include experiments, tests, and systematic investigation to develop new products, processes, or software. For example, developing new or improving existing software, developing or enhancing existing manufacturing processes, experimenting with new product prototypes, and more.
