Guest Columns

Research and Development (R&D) Tax Credit: Time to Take Another Look

For many organizations, taking the research and development (R&D) tax credit means identifying a hidden source of cash in addition to minimizing their tax liability. If you reviewed the R&D tax credit in the past and determined you would not receive benefit, it is time to take another look.

It has been a little over a year since Congress passed the Protecting Americans from Tax Hikes (PATH) Act of 2015 and Former President Obama signed it into law—and it contains many provisions for individual and business taxpayers. Some of the most significant improvements relate to the R&D tax credit. Not only did the law make the credit permanent, but it greatly enhanced the credit and made it available to more taxpayers.

Understanding the Research and Development Tax Credit

One of the common misunderstandings about the R&D tax credit is that it’s a deduction on the company’s tax return. In fact, it’s actually a dollar-for-dollar credit against what the company owes in state and federal taxes paid in a particular calendar year. In other words, it’s a direct reduction of the taxpayer’s tax liability. In the case of a C corporation, the credit is claimed on the entity tax return. S corporation shareholders and partners claim the credit on their individual tax returns. The credits may carry forward 20 years and, in addition to the federal tax credit, some states may offer an R&D tax credit as well. Companies can take the credit for all open tax years which usually equates to the previous three or four years plus the current year.