Federal Program
Federal Research & Development Tax Credit (IRC Section 41)
The federal credit for qualified research activities, available to businesses of any size that develop or improve products, processes, software, or formulations in the United States.
Program Overview
Enacted in 1981 and made permanent by the PATH Act of 2015, the federal research credit rewards businesses that invest in technical experimentation in the United States. Taxpayers may compute the credit under the regular method or the Alternative Simplified Credit (ASC) method. Qualified small businesses may also elect to apply a portion of the credit against payroll taxes rather than income tax. Claims must be supported by contemporaneous documentation of qualified research expenses (QREs).
Eligibility
- Any US taxpayer conducting activities that satisfy the four-part test may qualify.
- Research activities must have a permitted purpose, be technological in nature, seek to eliminate technical uncertainty, and involve a process of experimentation.
- Funded research, research conducted outside the United States, routine quality control, market research, and certain post-commercial-production activities are excluded.
Benefits
- Provides a dollar-for-dollar reduction of federal income tax liability.
- Qualified small businesses with gross receipts under $5 million and no gross receipts for more than five years may elect to offset up to $500,000 of payroll taxes annually.
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