Three people in an office are looking at a computer screen together. The text on the image reads, "R&D Tax Credit: Everything Business Owners Need to Know." There are multiple monitors and office supplies on the desk.

The government encourages private-sector innovation by offering incentives, such as the federal research and development (R&D) tax credit, to businesses that invest in qualified research activities. While this credit used to be aimed at corporations with seemingly endless budgets, that is no longer the case. Now, this credit is available to medium and small businesses who wish to participate, too. A barrier often cited by those businesses is the complex process of claiming this credit.

Use this article as your introduction to the R&D tax credit, assess your eligibility, and how to claim it if you qualify.  

What Is the R&D Tax Credit?

To spur R&D in America, the government offers this credit representing a dollar-for-dollar reduction of your business's tax liability for certain R&D-related expenditures.

Expenses that typically qualify for this tax credit include: 

  • Design and development of new products
  • Refinement of existing products
  • New processes
  • Innovative techniques 
  • State-of-the-art software.

    • R&D Tax Credit: Am I Eligible?

    Generally, if your business invests in R&D for a product, process, or technique, you could qualify for this federal tax credit. The Protecting Americans from Tax Hikes (PATH) Act passed in 2015 has aided medium and small businesses in pursuing this credit. While there's no formal process for measuring your business's eligibility, there is a specific process for claiming this credit. 

    How to Claim R&D Tax Credits

    Review the following steps and information to ensure a smooth submission process. 

    IRS Form 6765

  • What is Form 6765? You would file Form 6765 to claim the tax credit for your business's R&D investments. 
  • Why is it required? You will need to show your qualifying R&D expenses along with supporting materials, such as business and financial records and technical documentation, that illustrate how your costs meet IRS requirements to claim this credit. 
  • How do you fill it out? There are four main sections you would need to complete:
  • The first part, Section A, is where you would claim the regular credit. You are required to address lines 1,2,3,7,8,10,11, 17.
  • Fill out Section B for the alternative simplified credit.
  • Use Section C to identify forms and schedules for reporting based on your business structure.  
  • Section D can be skipped unless you run a qualified small business and will be making a payroll tax election.

    • Benefits of the Federal R&D Tax Credit

    The federal R&D tax credit will benefit your business in several ways.

    Using the R&D tax credit reduces your business's taxable income on the federal level. Your business receives a dollar-for-dollar credit while still being able to deduct research-related expenses.

    When your business's federal tax liability is reduced, it increases cash flow. The increased cash can be used for reinvestment into the business, including future R&D initiatives. 

    Do R&D Tax Credits Carry Forward?

    Typically, if your development activities qualify for the R&D tax credit but have no federal income tax to pay in the current year, you can carry forward the credit to offset your tax liabilities on future profits. Your unused tax credit will carry forward for up to 20 tax years and may be carried back for one. 

    Claim Tax Credits and Ensure Tax Compliance for Your Small Business

    There are numerous tax credits on both the state and federal levels to take advantage of, but establishing eligibility and completing the filing process can be challenging. That's why many owners and entrepreneurs trust the tax professionals at 1-800Accountant, America’s leading virtual accounting firm for small businesses, for their financial needs.

    Whether it's business tax preparation payroll, tax advisory, or any of our professional accounting services, we have the affordable pricing solutions you need to identify every tax credit, various tax incentives, and tax benefits, helping your business remain compliant with a minimal income tax liability. Schedule a quick consultation – usually 30 minutes or less – to learn more.

    This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.