When looking at the tax code, instructions, and other forms, you’ll come across a number of different terms, some of which are easy to understand and some which aren’t. The IRS even knows this as they make an effort to include glossaries and definitions with some of their publications.
Unfortunately, not everything is clearly defined. Yet, understanding the distinction can make a difference in how you file your return.
One distinction that’s a bit murky is the one between R&D and R&E. Adding to this confusion is the use of these terms in similar tax acts over the years.
So what is the difference between R&D vs. R&E? Continue reading to fully understand this difference and the effect it has on your business’s taxes.
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What Is the Difference Between R&D vs. R&E?
The acronym R&D stands for research and development, while R&E is short for research and experimentation. While there may seem to be a distinction, in practice, there really is not one.
R&D encompasses a variety of activities, all with the goal of generating and expanding new knowledge. Within a business context, this new knowledge is used to develop new products, services, or processes. It can also be used to improve those that currently exist.
This process includes three groups of activities:
- Basic research – gathering new background knowledge to create a foundation to work from
- Applied research – investigation that works towards a specific objective
- Experimental development – systematic work that draws from this knowledge to create or improve products or systems
In general, development serves as a broader term that more adequately encompasses all of these steps and activities. Experimentation may be a bit too narrow for what some companies do during the process. Because of this, R&D is more commonly used than R&E. However, you will most likely see both terms used interchangeably.
How Are R&D Expenses Treated in Taxes?
Many businesses have some form of R&D, even if it’s just the process of perfecting and testing a new product before bringing it to market. However, some businesses and industries have a much more intense version of this process. This is particularly true for certain industries, including technology-focused ones.
This development is crucial to bringing new products and services to market, which directly affects the economy; because of this, the US government has used IRS Section 41 to introduce a general business tax credit to encourage research and development.
Credit For Increasing Research Activities
The tax credit was first introduced through the Economic Recovery Tax Act of 1981. However, it was initially planned to be a limited credit that would expire over a relatively short period of time. Over the years, it has expired and been extended a number of times. In 2015, the Research and Development Credit was made permanent. This is what brought the credit into the modern-day tax scene.
Previously, it was known as the Research and Experimentation (R&E) tax credit. It’s important to note that this is the same credit, though there have been a number of changes over the years.
Worried and confused about filing for the R&D tax credit? Find out more about how our software can make it easy and straightforward!
Modern Version of the Credit
The current version of the credit helps offset certain Qualified Research Expenses (QREs). It is open to all businesses of all sizes. This means that if you have the qualifying expenses and can prove that you spend the money on them, you should be eligible for this credit.
In general, these expenses will include the following:
- Wages for those who conducted or managed the research
- Expenses spent on third-party research
- Necessary supplies
There is a four-part test that can help you decide if your expenses fall under the QRE category. If you can take the credit, it can be worth up to 6.5% of your qualified research expenses. To do so, you’ll need to file Form 6765, Credit for Increasing Research Activities.
It’s important to note that there are a couple of options when it comes to calculating the credit. You can choose the regular credit, which combines 20% of your increase in QRE over a base amount and 20% of the excess of “basic research payments.” In recent years, those who choose the regular credit method must reduce their expenses under the IRC Section 174 expense deduction. Doing so is a common option.
Taxpayers can also choose to use the Alternative Simplified Credit, which is 14% of the QREs that are over 50% of the average QREs of the previous three taxable years.
How to Make Taking the R&D Tax Credit Easier
Unfortunately, deciding if your business expenses qualify and filling out the form can be a bit daunting for some. It can be hard to make this determination or to do the work involved without a deep understanding of how the credit works and what exactly it applies to. Luckily, there are resources that can help.
At TaxRobot, we offer R&D tax credit software that makes the whole process easier. We’ll help you find the tax credits you’re eligible for, then claim them. The software is easy to set up and start using, so you’ll save time wading through stacks of IRS instructions. We’ve helped businesses save up to $250,000 but offer value-based pricing. So if you don’t receive the tax credit, we don’t receive a fee. Plus, our audit defense will help field questions and requests, standing behind you and our work if you are audited.
If you need additional assistance, whether it’s planning ahead or during tax time, we can also assist via consultation. This means that you don’t have to worry about just dealing with software, as there are real people behind this software.
If you work with an accountant to file your business taxes, make sure to ask them if they use this software. Our software for accountants and CPAs helps make sure every credit and deduction is claimed.
Want to help your accounting clients take advantage of the R&D tax credit? Learn more about our R&D tax credit software for CPAs and accountants!
Take Advantage of the R&D Tax Credit
Understanding the difference between R&D vs. R&E is the first step in getting the most out of your business’s research and development activities when it comes to taxes. Take the time to fully understand this tax credit and how it can save you money. To make it even easier, consider using R&D tax credit software or working with a consultant to make sure to claim all of the credits you are eligible for.