Research and Experimentation Tax Credit Guide

Calculator and paperwork

Tax season can loom over companies with all its paperwork, technicalities, and endless hard-to-decipher jargon. There’s a lot to learn about filing your taxes properly and maximizing your return. It’s important to understand the ins and outs of taxes, especially those areas that aren’t well known or understood. 

The research and experimentation tax credit was introduced in 1981 to stimulate innovation and encourage investment in development in the US. Despite being around for over forty years, it’s still one of the most misunderstood tax credits available. 

This is why we’ve created this helpful guide! We’ll give you a detailed explanation of the R&E tax credit, who is eligible, and how it works. Keep reading to learn everything you need to know about this area of taxes so that you can use it to your company’s full advantage.

Related: How to Calculate R&D Tax Credit [Guide & Calculator]

What is The R&E Tax Credit?

The research and experimentation (R&E) tax credit is also known as the research and development (R&D) tax credit. This dollar-for-dollar tax credit offsets state and federal taxes and is available for any business involved in research and experimentation activities. 

The point of the R&E tax credit is to incentivize innovation for businesses by making their research and experimentation costs less of a burden. The R&E credit is one of many tax extenders, which are federal tax provisions that were originally set to expire in December of 2013. 

However, many of these tax extenders, including the R&E tax credit, are continuously renewed. Let’s get into some more details about this tax credit, so you can learn whether you qualify and how to use it for your business.

Who Qualifies For The R&E Tax Credit?

The R&E tax credit is open to businesses of all sizes. So long as you can prove that you’ve spent money on Qualified Research Expenditures (QRE), then you should be eligible. 

It’s also important to note that the scope of what is covered by the R&E tax credit is often expanding to encompass new innovations as technology advances and new problems emerge. 

Generally speaking, any business that engages in the following is likely to qualify for the R&E tax credit:

  • Developing new, more reliable, or improved products, formulas, or software
  • Creating prototypes or models
  • Performing reliability, certification, or environmental testing
  • Working on technical feasibility analysis
  • Paying consultants or third-party contractors as part of your research and development activities

While this isn’t a complete list, it should give you a general idea of the types of things you must be involved in to qualify for the R&E tax credit.

Paperwork

Do you need help figuring out how to claim the R&E Tax Credit? Visit us at TaxRobot for more helpful resources and information.

Which Expenses Qualify For The R&E Tax Credit?

Not all expenses relating to research and experimentation costs will qualify for the R&E tax credit. There are only three categories of expenses that qualify for this tax credit. Some examples of expenses that don’t qualify for the R&E tax credit include certain depreciable assets such as buildings and equipment, non-wage benefits for personnel, and overhead expenses. 

Only Qualified Research Expenses (QRE) can be used for the R&E tax credit. This includes wages and salaries for supervisors and employees who conducted and managed the research, expenses spent on research that was contracted out to a third party, and necessary supplies. 

The IRS has a four-part test available to help you determine whether certain expenses are considered QRE. Generally speaking, expenses that went toward research that follows the scientific method and is used to develop or improve a product, software, process, etc., will likely be considered a QRE.

Related: How to Calculate ERC Tax Credit [Guide & Calculator]

How Much Is The R&E Tax Credit Worth?

This will vary widely based on your business, whether the research was conducted in-house or by a third party, and several other factors. However, you can expect the R&E tax credit to be worth approximately 6.5% of qualified research expenditures. You aren’t required to use the entirety of your R&E tax credit for the current tax year. It’s important to remember that you are entitled to carry this credit back one tax year or carry it forward up to twenty years.

Paperwork

How Do You Get The R&E Tax Credit?

Businesses must fill out and file the proper paperwork to claim the R&E tax credit. You’ll need to file Form 6765, Credit For Increasing Research Activities. Filling out this form can be challenging, but plenty of resources are available to help you through it. 

Form 6765 has four sections: A, B, C, and D. The final two sections aren’t usually difficult to fill out, but the first two sections can be headache-inducing if it’s your first time filing a Form 6765.

It isn’t required to fill out Section A and Section B. You only need to fill out one of them, as they’re just different methods of calculating how much credit you’re entitled to receive. 

Section A is the regular method, while Section B is an alternative simplified method. The best way to determine which section you should file is to use them both to estimate how much credit you’re entitled to and then file the section that gives you the largest amount of credit. 

This will ensure you maximize your return to the fullest and get the most R&E tax credit possible. 

Related: R&D Tax Credit Guide

Summary

Tax time brings about plenty of tension and even anxiety for many companies and businesses. Navigating the intricacies, complexities, and technical jargon in our tax system can be a challenge even for the most seasoned accountant, let alone someone trying to file their taxes on their own accord.

That’s why we have created this in-depth, detailed guide on the Research and Experimentation Tax Credit. We’ve discussed this credit, who qualifies, and how to get the most out of it. Now that you know all about the R&E tax credit, you’ll be able to use this to your advantage while filing your taxes.

Are you looking for more resources to help you navigate your taxes? Visit us at TaxRobot for more helpful tools and resources.

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