The Research and Development Tax Credit

The research and development tax credit is an extremely valuable benefit to companies engaged in R&D. However, the credit is not just available to those who "wear lab coats and use test tubes [because] the definition of research and development for tax credit purposes is fairly broad."

The R&D credit is generally allowed for wages, supplies, and certain contract research expenses paid or incurred for qualified research. Qualified research means research, the expenses for which qualify as deductible business expenses, and which is undertaken for discovering technological information and developing a new or improved business component or process, and which involves a process of experimentation.

The credit is calculated from a base amount designed to encourage "increasing" research activities. The net benefit can be around 6.5 percent of qualified research expenditures, which reduces a company's taxes dollar-for-dollar, not including potential state tax benefits. For businesses that are in losses and don't pay taxes, unused credits can be carried forward for 20 years.

The credit became even more widely available due to a recent regulation that expands the class of companies that can benefit. Previously, the Alternative Simplified Credit (ALS) could only be taken on original returns, not amended returns from past years. Now, the ALS can be taken on past year amended returns, making it much easier to offset the cost of an R&D tax credit study.

The R&D credit technically expired Dec. 31, 2013, requiring Congress to enact legislation extending the credit. Fortunately, this is what typically happens. "Congress has extended the R&D credit 15 times since its inception in 1981. In 11 of those instances, the extension retroactively restored the credit."


I have a question for you. I started an LLC under which I am going to be doing several projects. One of which is the development of a new product (that should count under all the rules). But I am not making any money now - I just have the expenses of my time. So, for an LLC that I started to try and develop a product, can I count my hours/wages now to be carried forward when I start making money in the future?

Great question. I don't think you would qualify for the credit yet since without income, you wouldn't have any self-employment earnings. The R&D credit is based on expenses (including wages) paid for qualified R&D, which in your case would be the portion of your self-employment earnings attributable to your time spent exclusively on R&D (assuming your LLC is taxed as a disregarded entity and files as a sole proprietorship). There are other limitations as well as different methods for calculating the credit that would be worth discussing with your CPA.