The research and development (R&D) tax credit is a government-backed incentive that compensates companies for performing qualifying activities within their operations. First implemented almost forty years ago, the R&D tax credit was uniquely designed to reward and incentivize innovation throughout the U.S. economy as a means to enable American businesses to maintain a competitive edge in global markets as well as encourage enterprises to keep technical jobs stateside.
The Federal R&D Tax Credit Program Has Evolved Over Four Decades
The research and development tax credit has undergone numerous iterations since its inception. However, its purpose has always remained the same. The innovation tax credit reimburses companies for expenses incurred when:
- Developing new products or processes
- Improving existing products or processes
- Creating or enhancing existing software or prototypes
In its current version, the R&D program remains one of the most effective ways for technology-centric organizations to minimize their tax burden, yielding several impressive benefits, such as:
- Up to 13.5 cents (federal and state combined) of an R&D credit for every eligible dollar
- Potential dollar-for-dollar tax reduction
- Reduced effective tax rate
- Increased cash flow
- Carryforward credit (up to 20 years)
Utah Offers Local R&D Tax Credit Benefits to Business Owners
In addition to the federally sponsored R&D tax credit initiative, several states also offer their own version of the program to encourage local organizations to pursue innovation. Utah is one of the states participating in the program. Under Utah legislation, the state offers a non-refundable R&D tax credit to local taxpayers with qualifying research expenditures.
In many ways, Utah's research and development tax initiatives mirror the benefits and regulations outlined by the IRS in Section 41. However, there are some differences that Utah business owners should understand to best optimize the credit for their operations. The two main components of the Utah innovation tax program include:
Credit for Increasing Research Activities in Utah (Code 12)
According to Utah legislation, the credit is the sum of:
- 5% of a taxpayer's qualified expenditures from increasing research operations in the state above the base amount*
- 5% of payments made to qualifying organizations for increasing basic research in Utah beyond the base amount*
- 7.5% of qualified research expenses (QRE) for the taxable year**
*Utah business owners may carry forward eligible credits for up to 14 years
**Not qualified for carryforward credits
Carryforward of Credit for Machinery and Equipment Used to Conduct Research (Code 13)
Utah's current R&D tax program also offers a carryforward component. The credit has expired for any taxable years beginning after 2010. However, any business owners who had claimed a credit on their tax returns for any machinery and/or equipment used to perform qualifying research activities after 1998 and before 2011, which resulted in a credit greater than tax liability that year may carry forward the credit. Utah allows taxpayers to carry forward the excess credit over the next 14 years to offset future taxes until the extra credit is completely absorbed.
Are You Claiming R&D Tax Credits in Utah?
Acena Consulting partners with Utah business owners in a multitude of verticals to optimize both local and federal innovative tax benefits. Contact us today to hear more about how we can help your Utah enterprise optimize R&D tax credit results.