The R&D Tax Credit is a federal and state (most states) tax credit that can result in dollar-for-dollar reduction of taxes owed at year end or potentially against quarterly payroll taxes, for startups. Originally enacted in 1981, under the Economic Recovery Tax Act, the credit expired 8 times and extended 15 times until it was made permanent in 2015 under the PATH Act (Protecting Americans from Tax Hikes). Primarily a labor based incentive, the tax credit aims to promote further innovation by creating positive cash-flows and reducing taxes owed.
The Credit for Increasing Research Activities (the “R&D Credit”) is a government-sponsored tax incentive that rewards companies who conduct research and development in the United States and its territories. The tax credit, originally enacted in 1981 under the Economic Recovery Tax Act, was implemented to incentivize innovation throughout the economy and to keep technical jobs here in the U.S. Finally made permanent in 2015 under the PATH Act (Protecting Americans from Tax Hikes), the R&D Credit is primarily a labor-based incentive to promote further innovation by creating positive cash-flows and reducing taxes owed.
Typically, “Research and Development” implies laboratories, test tubes, and white labs coats. However, the IRS’s definition of R&D is rather broad and can be applied to many industries, including manufacturing, engineering, architecture, food & beverage, and software development.
Any business of any size can claim this tax credit if their R&D activities meet the definition of the 4-Part Test, and if the associated expenditures qualify under IRC Section 41.