Research Activities Credit

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What is ‘Research Activities Credit’

The Research Activities Credit is a nonrefundable federal tax credit that allows businesses and eligible entities to obtain additional funds to pay for research-related expenses.

BREAKING DOWN ‘Research Activities Credit’

The Research Activities Credit was implemented in 1981 and was intended to act as an incentive for companies and other entities to increase their research and development. The credit is open to all eligible individuals, estates, trusts, organizations, partnerships and corporations. The credit must be claimed by using Form 6765, Credit for Increasing Research Activities. It can be found on the Internal Revenue Service (IRS) web site. Anyone looking to see if they qualify for the credit should consult the IRS web site or a licensed tax professional.

The credit is limited to specific forms of research which are called qualified research expenses. These expenses must be taken in conjunction with discovering performance enhancing technologies. Items that only serve to provide superficial improvements will not qualify. Companies must have increased spending on research related initiatives from the prior tax year to claim the credit. There are some exceptions which should be confirmed on the IRS website as they are subject to change.

An Example of the Research Activities Credit

For an example, take the Pear Automotive Corporation. They make automobiles and related technologies. During the 2016 tax year they spent $500,000 on research and development. During this time, they came up with a brand-new idea for automobiles to come with global positioning tags. This will help family members to be able to track one another’s movements while they are on the road. In theory, removing the need to contact someone while they are driving to see how much longer it will be before they arrive to a new location.

Since Pear Automotive Corporation increased their spending from 2015, which was only $250,000 they can take advantage of the Research Activities Credit. In 2016, Pear Automotive Corporation also improved the design of their 2017 model sports utility vehicle, making the front end more visually appealing than the prior year’s version. This development will not be eligible for the tax credit as the improvement is purely superficial.

Consider another example with the Pear Automotive Corporation. In 2017 their research and development plateaued, and they only ended up spending $500,000 for the year. Since there was no new technology developed, and their research spending did not increase from year to year, they are unable to apply for the Research Activities Credit for the 2017 tax year.