Table of Contents

Research Activities Tax Credit: What It Is, How It Works, and Example

By

澳洲幸运5开奖号码历史查询:Julia Kagan

Updated October 01, 2024

Reviewed by

Lea D. Uradu

Scientist in a lab — izusek / Getty Images

What Is the Research Activities Tax Credit?

The Research Activities Tax Credit allows businesses and other eligible entities to offset funds invested in certain research-related expenses through a reduction in their federal taxes. For every dollar spent on these research and development (R&D) 🅷expenses, the business or organization 🍃will spend a dollar less in taxes.

Like most tax credits, it's non-refundable, meaning that if an organization owes no taxes, it won't benefit from this credit—it doesn't add to a tax refund.

Key Takeaways

The Research Activities Tax Credit is a federal tax credit that incentivizes businesses and organizations to increase their research and development.
To be eligible, the research must improve a product and cover certain scientific disciplines and/or internal software.
This credit can reduce small businesses' Alternative Minimum Tax liability.
Qualifying start-ups with no federal tax liability can use the credit for payroll taxes up to $250,000 for a maximum of five years.

Understanding the R🍸esearch Activities Tax Credit

The 澳洲幸运5开奖号码历史查询:Internal Revenue Service (IRS) implemented the Research Activities Credit in 1981 as an incentive for companies and other entities to increase their research and development. The credit is available to individuals, estates, trusts, o♋rganizations, partnerships, and corporatio🔯ns that pay for qualified research expenses conducted in the United States. Expenses can include wages, supplies, and a significant portion of funds paid to a third party to conduct qualified research (65% to 75%, depending on the type of entity hired).

Partnerships and S Corporations must complete and submit IRS Form 6765, Credit for Increasing Research Activities to claim this credit. Others may claim it directly on IRS Form 3800, General Business Credit, except in cases where an estate or trust has the option to allocate the credit to 澳洲幸运5开奖号码历史查询:beneficiaries.

Qualified research expenses must involve business-related technological experimentation involving the hard sciences (engineering, biology, computer science, etc.).

Important

The work must seek to significantly enhance a product's function, performance, reliability, or quality.

Additional rules apply to internal use software, which refers to computer programs not designed for sale, but to be used within a company to improve efficiency or other internal business functions. To qualify for the research activities credit, the software must offer the possibility of significant economic benefit through increased speed, reduced costs, etc. Its development must involve significant time, cost, and risks, and nothing comparable can be available for sale or lease.

Due to changes enacted in 2015, small businesses can apply this credit to reduce their Alternative Minimum Tax liability, and qualifying start-ups with no federal tax liability can apply it to payroll taxes up to $250,000 for a maximum of five years.

Example

For an example, take the fictional Kumquat Automotive Corporation. They make automobiles and related technologies. During the 2024 tax year, they spent $500,000 on 💫research and development. During this time, they came up with a brand-new idea for automobiles to come with global positioning tags. This will help family members track one another’s movements while they are on the road, decreasing the need to contact someone while they are driving.

The same year, Kumquat Automotive Corporation also improved the design of their 2025 model sports utility vehicle, making the front end more visually appealing than the prior year’s version. The qualified expenses related to the development of the global positioning tags would qualify for the research activities credit, but those associated with changing a vehicle's look would not, as the improvement is purely superficial.

What Is a Tax Credit?

A tax credit reduces the amount of taxes you must pay the Internal Revenue Service (IRS). If you owe taxes, you'll owe less. If you're getting a refund, you might get more—it depends on whether the credit is refundable. For example, the Earned Income Tax Credit is a refundable tax credit. However, most tax credits don't work this way; they're not refundable. (The Research Activities Credit is nonrefundable.) That means that if you owe nothing, you're not getting any money from the IRS.

What Is Research and Development?

Research and development is a field of work that focuses on the improvement of products and processes, optimizing and innovating so a company or organization's work is more profitable and efficient. In the product pipeline, the research and development phase is one of the earliest, coming before production.

Are We Getting a Child Tax Credit in 2024?

Yes, you can get a child tax credit as long as you meet the criteria (for example, the child must have a Social Security number) and your income is less than $200,000, or $400,000 if you're married and filing jointly.

The Bottom Line

The Research Activities Credit is a nonrefundable federal tax credit implemented as an incentive for businesses to increase their research and development. To see if you qualify for this tax credit, consult the IRS website or a licensed tax professional.

Article Sources

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