Top Reasons Taxpayers Should Continue Claiming the R&D Tax Credit

Despite recent changes to tax law, the R&D Tax Credit remains one of the most valuable incentives available to innovative businesses. Here’s why taxpayers should continue to take full advantage of it: this credit helps offset the costs of developing new products, improving processes, and advancing technology—allowing companies to reinvest in growth and stay competitive in a rapidly evolving marketplace.

The R&D Tax Credit is more than just a financial incentive—it’s a catalyst for innovation and growth. By leveraging it, your business not only strengthens its competitive edge but also contributes to broader economic advancement. The credit is designed to support a wide range of qualifying activities, including developing prototypes, enhancing software, improving manufacturing processes, and testing new techniques. Eligible expenses can include employee wages, materials, cloud computing costs, and third-party research. With its broad applicability, the R&D Tax Credit offers significant opportunities for industries like software development, manufacturing, life sciences, healthcare, and more.

Reasons to Take Advantage of the R&D Tax Credit

The R&D Tax Credit is a valuable opportunity for businesses investing in innovation, research, and development. Whether you’re a startup or an established company, leveraging this credit can provide significant financial benefits, support growth, and help you stay competitive. Here are the top reasons to take full advantage of this powerful incentive:

Financial Relief for Innovative Businesses: The R&D Tax Credit may provide financial relief to those who qualify by offsetting payroll taxes or reducing tax liabilities, freeing up much needed cash flow for continued research and growth. This makes it a strategic choice for businesses seeking to maximize resources and fuel ongoing innovation, particularly for startups and early-stage companies.

Responding to Section 174 Tax Law Changes: The 2017 Tax Cuts and Jobs Act revised Section 174 for tax years after 2021. The law no longer allowed businesses to immediately deduct their R&D expenses. Instead, businesses were now required to capitalize and amortize R&D expenditures over five years for domestic R&D expenses and fifteen years for foreign expenses. This change affects all businesses conducting R&D activities, whether or not they claim the R&D Tax Credit. To ease the increased tax burden and maintain financial flexibility, the R&D Tax Credit is more imperative than ever. While the future of Section 174 remains uncertain, it is critical to consult with a tax professional to ensure your business remains compliant.

State-Level Incentives: Besides the federal R&D Tax Credit, many states offer their own R&D incentives, with some even providing refundable credits. These state-level incentives can significantly enhance your overall tax savings, allowing you to maximize both federal and state benefits for your R&D investments.

Broad Eligibility: The R&D Tax Credit supports a wide range of innovative activities beyond groundbreaking discoveries. Common qualifying activities include developing or improving products or processes, creating or enhancing software, and conducting technical feasibility studies. If your business engages in these types of activities, you may be eligible for the credit. Therefore, it becomes prudent to regularly reassess your eligibility to ensure you don’t miss out on valuable tax savings.

Clearing Up Misconceptions

Many businesses overlook the R&D Tax Credit due to common misconceptions, missing out on a valuable opportunity for tax savings. One common myth is that the credit only benefits profitable companies. In reality, even businesses with little to no income tax liability can take advantage of the credit, as it can be carried forward for up to 20 years, creating a significant tax savings reserve for the future.

Another misconception is that the credit only applies to work done in scientific labs. In fact, many qualifying activities involve everyday processes like software development, manufacturing improvements, or technical feasibility studies—no lab coats or scientific equipment required.

While the process might seem daunting, it becomes much more manageable with the proper guidance. Working with knowledgeable advisors can simplify determining eligibility and help ensure you capture the full benefit of the credit.

Navigating Documentation Requirements

To enhance the consistency and transparency in claiming the R&D credit, the IRS has significantly updated Form 6765, Credit for Increasing Research Activities, beginning in tax year 2024. One of the most notable changes is the introduction of Section G, which requires businesses to report Qualified Research Expenses (QRES) on a business component level. This form change necessitates a more rigorous documentation process and emphasizes the importance of maintaining substantial documentation in support of credit claims.

Unlock Innovation and Drive Growth

With its valuable financial relief, state-level incentives, and substantial economic benefits, the R&D Tax Credit is a strategic tool that innovative businesses can’t afford to overlook. Contact your CRI advisor today to explore how you can maximize your R&D Tax Credit and drive growth for your business. By investing in innovation through the credit, you’re paving the way for sustained success and ensuring your business remains at the forefront of industry advancements.