The Research and Development (R&D) Tax Credit is a tax incentive designed to encourage companies to invest in R&D. The credit allows companies to reduce their tax bill or claim payable cash credits as a proportion of their R&D expenditure. The R&D tax credit is available at both the federal and state level, with over 30 states offering a credit to offset state tax liability.

To qualify for the R&D tax credit, a company must be developing new or improved business components, including products, processes, computer software, techniques, formulas, or inventions, that result in new or improved functionality, performance, reliability, or quality. The definitions of eligible R&D and eligible costs are reasonably broad, and eligible R&D activities often take place across the whole range of company operations.

The R&D tax credit is calculated on the basis of increases in research activities and expenditures, and as a result, it’s intended to reward companies that pursue innovation with increasing investment. Typically, 6% to 8% of a company’s annual qualifying R&D expenses can be applied, dollar for dollar, against its federal income tax liability. Unused R&D credits due to lack of tax liability can be carried forward up to 20 years.

To claim the R&D tax credit, businesses can file IRS Form 6765, along with supporting financial records or technical documents. The IRS recommends that businesses calculate their credit using both the regular credit and simplified credit methods and then fill out the section (A or B) that results in the greatest tax benefit.

In summary, the R&D tax credit is a tax incentive designed to encourage companies to invest in R&D. It allows companies to reduce their tax bill or claim payable cash credits as a proportion of their R&D expenditure. The credit is available at both the federal and state level, and to qualify, a company must be developing new or improved business components that result in new or improved functionality, performance, reliability, or quality.