Federal and state tax credits are available to a host of industries for activities that are deemed pertinent to research and development (R&D).

These credits are not limited to scientists and medical researchers. The permanent extension in 2015 made this credit more broadly available across industries and activities.

What is the credit?

The research and experimentation tax credit, also known as the research and development (R&D) tax credit provides cash incentives for companies conducting R&D in the U.S. The credit was designed to encourage research and development in companies of all sizes, across many industries.

For thirty-five years, Congress, and many states, have encouraged technically innovative companies to take research and development tax credits. Large companies have long-established programs to take advantage of these credits. Small and mid-size companies have often failed to get their fair share.

Since 2001, the IRS has continued to issue regulations that make it easier for a broader array of companies to qualify their activities as R&D. In late 2015, Congress made the R&D credit permanent and provided two tax benefits for eligible small businesses.

What R&D Qualifies Today?

Today a company that is using some form of technology, such as engineering, to develop its products, services or manufacturing skills, is likely to qualify for R&D tax credits. Companies do not need patents or even an R&D department to qualify. In fact, the IRS continues to expand the definition of qualifying R&D. Companies are being encouraged to do their R&D in the U.S. and take these credits. Many states follow the federal R&D regulations and provide significant additional credit against state tax liability.

Some Start-Up Companies may offset Payroll Taxes with the credit:

As of January 1, 2016, certain start-up companies are allowed to utilize the research credit to offset the employer’s payroll tax (i.e., FICA) liabilities. These companies must meet certain criteria, such as having sales of less than $5 million per year. Further, the credit may not exceed $250,000.

Eligible Small Businesses may claim the credit against the Alternative Minimum Tax (AMT)

Eligible small businesses, defined as those with average sales of less than $50 million over the prior three tax years, will be able to use the credits to offset AMT for tax years as of January 1, 2016.