Understanding Section 41: The Research and Development (R&D) Tax Credit
The U.S. government offers the Research and Development (R&D) Tax Credit under Section 41 of the Internal Revenue Code (IRC)
October 5, 2022
The Research and Development (R&D) Tax Credit was originally set up in the 1980s to encourage innovation and competition for U.S. businesses. Now a permanent fixture, it’s important to understand if your startup or small business qualifies so you can benefit from the credit. In 2021, more companies are using custom machinery, software, and robust operations to advance their products or processes. This increase in innovation allows for more businesses than ever before to qualify for the tax benefit.
Applying for the credit may be your ticket to reducing federal or payroll taxes by a percentage of costs you incur from the time, material, and wages spent on qualifying activities.
The IRS has established a four-part test to help determine and if your company’s activities could potentially qualify:
1. Permitted purposes: Your company’s activities should relate to a new or improved business component’s function, composition, performance, reliability, or quality.
2. Technological in nature: Performed activities must fundamentally rely on principles of physical or biological science, computer science, or engineering.
3. Elimination of uncertainty: Your company’s activities are intended to uncover information to eliminate uncertainty concerning the capability, method, or design for developing or improving a product or process.
4. Process of experimentation: The qualifying activities of the company must constitute the process of experimentation, which may include modeling, testing, simulation, or a systematic trial and error methodology, confirmation of hypotheses, or redefining/discarding of hypotheses.
If you passed this four-part test - or even if you didn’t - it’s time to pursue the possibilities of your credit. Use our free evaluation to quickly assess your potential credit amount. If you have more questions, you can always contact us.