The R&D (Research and Development) Tax Credit is a federal benefit that provides a dollar-for-dollar reduction in a companys tax bill based on qualified domestic expenses related to the design, development, or improvement of products, processes, techniques, formulas, or software. The credit was originally introduced in the Economic Recovery Tax Act of 1981 and has been extended and modified several times since then. The credit allows for three calculation methods based on the taxpayers date of incorporation, initiation of qualified research, and ability to collect required contemporaneous documentation. The Traditional Credit Calculation and Start-Up Credit Calculation provide a credit of 20% of the taxpayers qualified research expenditures that exceed a calculated base amount. The legislative intent for the R&D Tax Credit is to increase R&D spending in the United States.

To qualify for the R&D Tax Credit, a company must engage in certain activities to develop new or improved products, processes, software, techniques, formulas, or inventions that result in new or improved functionality, performance, reliability, or quality. The activities must meet a four-part test, which includes the following criteria: the activity must be technological in nature, the activity must be intended to eliminate uncertainty, the activity must involve a process of experimentation, and the activity must be related to the development of a new or improved business component.

The R&D Tax Credit can provide several benefits to businesses, including a dollar-for-dollar reduction in federal and state income tax liability, an increase in earnings-per-share, a reduction in the effective tax rate, an improvement in cash flow, and the ability to carry forward the credit up to 20 years. The credit can offset up to 10% of annual R&D costs for federal purposes and much more when state credits are factored in. 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 that results in the greatest tax benefit.