A wide range of fields and businesses invent the future each day, developing new or innovative products, processes, or solutions. As a result, these activities may be eligible for the research and development tax credit, regardless of industry. Businesses operating in numerous industries may qualify for this valuable incentive.

These organizations are making a difference in their respective industries and the world at large. This is why it's essential to recognize that organizations conducting research and development activities can qualify for R&D Tax Credits.

Reducing Tax Liability With the R&D Tax Credit

One of the best ways for U.S. businesses to reduce their company's tax liability is by taking advantage of the Research and Development (R&D) tax credit. Qualified activities broadly include developing new products, processes, or services. Additionally, companies can carry forward unused credits from prior tax years for up to twenty years to offset current year tax liabilities. By taking advantage of this incentive, businesses can potentially save thousands of dollars in taxes every year.

Why Do R&D Tax Credits Exist?

The research and development tax credit is a federal incentive program designed to encourage businesses to invest in innovation. The program provides tax credits for businesses investing in research and development activities related to products, processes, software, technology or formulas. These credits are a dollar-for-dollar offset against regular income tax liability and have enabled many startup and mature businesses to hire additional employees, invest in new technologies and equipment, and finance other business objectives. It’s important to note that startup companies don't have taxable income to take advantage of the credit (rather than revenue which has no impact). Qualifying smaller companies and startups can elect to take the benefit as a payroll tax offset, claiming up to $250,000 until tax years beginning after January 1, 2023. Starting in 2023, the credit will go up to $500,000

Further details on the credit are outlined under Section 41 of the Internal Revenue Code.

Fortunately, the 2015 The Protecting Americans from Tax Hikes (PATH) Act made the R&D tax credit permanent and modified the credit for the benefit of small businesses, mid-size businesses, and start-ups.

This "game-changing" credit offers businesses in over 40 industries a dollar-for-dollar reduction in tax liability. Here is a list of many of the industries where businesses can qualify for R&D credit and how these industries can benefit from this credit.

Manufacturing

The manufacturing industry has long been recognized for its innovative R&D efforts. With the introduction of new technology and materials, manufacturers can improve product quality and production efficiency. Aspects of the manufacturing industry that count as research and development activities include product design, prototyping, testing, experimentation, process development, and improvements.

Engineering

Engineering firms are often at the forefront of technological advances in their industries, with teams of engineers constantly working to develop new products and processes. Aspects of engineering that can qualify for the credit include product and process design or improvements, on-site innovative solutions, modeling, and testing of new technologies.

Software Development

Software is an ever-evolving industry, with new applications and technologies being created all the time. Aspects of this industry that qualify as R&D activities include architecture, design, data flow, programming, API development, UI design, and testing.

More recent taxpayer-favorable IRS rules boost opportunities for software developers to claim R&D tax credits for internal use software (IUS) software. IUS must pass the 4-part test and a more stringent 3-part test to qualify. 

Medical Devices

Medical device companies are often in the business of creating groundbreaking new products and processes for the healthcare industry. Aspects of medical device development that qualify for the credit include design, prototype development, testing, and clinical trials.

Pharmaceuticals

Pharmaceutical companies are always striving to develop new medicines and treatments that can improve the quality of life for patients. Aspects of pharmaceutical R&D include discovery, chemical synthesis, and clinical trials.

Biotechnology

Biotechnology is a rapidly evolving field, with new products being constantly developed. Biotech can include anything from developing new drugs and treatments to creating genetically modified organisms. Aspects of biotechnology that qualify for the research and development tax credit include researching and developing new products and processes, software, or technologies; testing and experimentation; and clinical trials.

Energy Efficiency Businesses

Energy efficiency businesses are dedicated to helping organizations reduce their energy consumption and improve their overall sustainability. Aspects of energy efficiency that may qualify for the research and development tax credit include researching and developing new technologies, testing and experimentation, and designing energy savings programs utilizing new technologies or processes.

Renewable Energy Producers

Renewable energy has become an increasingly important part of the global energy landscape. Aspects of renewable energy production that can qualify for the research and development credit tax credit include researching and developing new technologies, testing and experimentation, and designing renewable energy programs.

Corporate Research Departments

Corporate research departments are responsible for researching and developing new products, processes, or technologies for their organizations. Aspects of corporate research that can qualify for the R&D tax credit include researching and developing new products, processes, or technologies, testing and experimentation, and evaluating existing products.

Technology Startups (e.g., Artificial Intelligence, Data Management Services)

Technology startups often create innovative and disruptive products and services. Aspects of technology startups that can qualify for the R&D tax credit include researching and developing new technologies, application and hardware design, integration of disparate technologies, and evaluation of existing technologies.

Food & Beverage Manufacturers

Food and beverage manufacturers are often striving to create new products that meet consumer demands. Aspects of food and beverage manufacturers that can qualify for the R&D tax credit include researching and developing new formulas for low-fat, low-carb, gluten-free products.; testing and experimenting; evaluating existing products; new production and sanitation process design.

Construction & Engineering Firms

Construction and engineering firms are responsible for building the physical infrastructure of our cities, towns, and communities. Aspects of construction and engineering that can qualify for the R&D tax credit include building and site design, roadway, infrastructure, and traffic design, flood water mitigation design, and site and energy efficiency design.

Architectural Firms

Architectural firms are responsible for designing and constructing buildings, structures, and other physical environments. Aspects of architecture that qualify for the R&D tax credit include researching and developing new design concepts, building and site design, interior structural design, building infrastructure design, and site abatement or remediation designs.

Agriculture

Agriculture businesses can qualify for the R&D tax credit. Aspects of agriculture that can qualify for the R&D Tax Credit include researching and developing site design for water, irrigation, and fertilization, pest abatement, product hybridization, soil enhancement research, crop durability improvements, harvesting technique improvements, crop transportation design, and processing design and improvements.

Aerospace and Defense Contractors

Defense contracting goes hand in hand with research and development. As the countries work to maintain the military advantage and balance powers, new technologies are necessary for that reinforcement. Aspects of the aerospace and defense industries that can qualify for the R&D tax credit include researching and developing new products, technologies, processes, applications, artificial intelligence, product integrations, testing, and experimentation.

Robotics

It's practically in the name itself, but robotics is one of the fastest-growing and most exciting industries for R&D, as it is implicit in developing ever-advancing robotic and autonomous systems. Aspects of robotics that can qualify for the R&D tax credit include researching and developing new technologies, integration of AI and new technologies, application development, materials testing, automation design, and experimentation. 

Automotive

Automotive businesses have a rich history of constant innovation, from the assembly line to self-driving technology. Aspects of automotive research and development that can qualify for the R&D tax credit include researching and developing new technologies, integration, and design of new software, improved durability, improved safety, aerodynamics, and automation design.

Chemicals

Chemical engineering companies are developing safer, greener versions of existing technologies and products. Aspects of chemical engineering that can qualify for the R&D tax credit include researching and developing new formulations, stability, durability, packaging, compounding, and disposal.

Aviation

Aviation companies are developing new technologies to make air travel more efficient and safer. Aspects of aerospace/aviation that can qualify for the R&D tax credit include researching and developing new technologies, enhanced safety design, improved connectivity, aerodynamics, improved fuel efficiency, materials analysis and testing, increased propulsion efficiency, and experimentation.

Furniture

Furniture companies are always looking for ways to improve their products and bring innovative designs to market. Aspects of furniture products and design that can qualify for the R&D tax credit include researching and developing new products, testing new materials, new and improved product design, new production processes, enhanced safety, and durability.

Metals & Mining

This industry includes operations such as mining, smelting, and refining of metals. Aspects of metals and mining that can qualify for the R&D tax credit include researching and developing new technologies: improved extraction techniques, improved processing, more efficient smelting and sintering techniques, and more efficient refining processes.

Textile and Apparel

Textile and Apparel companies are developing new and innovative products that continue to drive their growth and success. Examples of innovations that can qualify for R&D tax credits include new and improved fabrics, new coating formulations to improve durability, new designs to improve functionality in the wind or poor weather, and improved designs for better functionality. 

Cannabis, CBD, & Hemp

The recent legalization of cannabis, hemp, and hemp-related products in several U.S. states has caused lawmakers to reevaluate production across our country. Like many other agronomic businesses, research and development are crucial in helping growers develop and improve new and existing practices, many qualifying as eligible R&D activity. Experimentation with new plant strains and fertilizer formulations, design and development of new drainage systems, and testing new ways to improve water utilization are just some of the many possible qualifying activities for businesses operating in this industry. 

How Do I Get Started?

If you are looking to take advantage of the R&D tax credit, an excellent first step is to contact a qualified tax advisor or accountant. They can help you with all the details, including the documentation and filing requirements, to take full advantage of the credit. Records may include payroll taxes, gross receipts for qualified research expenditures, general ledger, tax returns, project listings, time tracking, and other documentation to support R&D efforts.

The best way to maximize these tax credits is by keeping detailed records of all research and development activities. This includes tracking the time spent on these activities and documenting any expenses related to the project. Additionally, all claims should be supported and documented with credible employee testimony.

We can help you optimize for a more significant return with the R&D credit:

• Offset the Federal Insurance Contributions Act (FICA) portion of their annual payroll taxes
• Reduce your federal (and potentially state) income tax liability
• Increase cash flow for growth and investment

Contact Acena Consulting today to help your business get the full benefit of this credit.