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The Research and Development Tax Credit
The R&D tax credit rewards businesses for investing in innovation through tax savings on qualified research activities.
Get StartedThe Research and Development Tax Credit
Investing in research and development (R&D) is crucial for businesses to stay competitive, adapt to evolving customer demands, and leverage new technologies. Many businesses are not fully utilizing the Research and Development Tax Credit (R&D Credit), which is designed to reward investments into R&D and can help offset the cost of innovation and development.
The R&D Credit is available to all businesses, large and small, that engage in qualified R&D activities, providing a significant financial incentive. Qualified small businesses may be able to apply a portion of the R&D Credit as a payroll tax credit.
What Research Activities Qualify?
To claim the R&D credit, business activities must pass a four-part test. Qualifying activities typically involve developing or improving processes or products, regardless of their success.
A “Qualified Research Activity” must satisfy the following criteria:
- Technological in Nature: The activity relies on principles of physical or biological sciences, engineering, or computer science.
- Permitted Purpose: The aim is to create new or improved functionality, performance, reliability, or quality in a product or process for use in business and commerce.
- Eliminates Uncertainty: The activity seeks to resolve uncertainties regarding the development or improvement of a product or process.
- Process of Experimentation: The activity involves a systemic process of evaluating alternatives, testing hypotheses, and refining ideas.
Qualifying Activities
There are many types of R&D activities that may qualify for the R&D tax credit. Examples of some activities that commonly qualify include:
- Testing for compliance with regulatory requirements
- Improving manufacturing or production processes, techniques, or procedures
- Software development, coding, Alpha/Beta testing
- Designing, developing, and/or testing of prototypes
- Developing computer-aided (CAD) modeling, simulation, and/or testing
- Testing alternative or new materials/ingredients to improve a product
- Developing new or improved fermentation, packaging, and/or mixing techniques
While these activities may qualify, each company’s situation and available supporting documentation is unique and should be assessed to ensure compliance with applicable law and regulations.
Eligible Expenses
To claim the federal R&D tax credit, business expenses must meet qualifying criteria. Eligible expenses for the R&D tax credit can include wages, supplies, contract expenses, and cloud computing. General and administrative costs, such as rent, utilities, overhead, or depreciation are typically not eligible for the R&D tax credit.
State Credits
In addition to the federal R&D Credit, many states offer their own R&D credit. These state-level credits vary in structure and eligibility and provide an additional incentive for companies to invest in research and development efforts with their respective regions.
Why Synergi?
Synergi helps businesses calculate and review the substantiation needed for R&D Tax Credits and we work with your tax advisers to develop and support your claim. Our team takes care of the details so you can focus on running your business.