As the business landscape continues to change at a fast pace, manufacturers are in the hurry-up mode to research and develop new product lines and research process improvements for the ways they produce their products.  Research & Development (R&D) expenditures can be costly and we want to make sure you’re accounting for them correctly and receiving the tax credits available from the IRS.

What qualifies for the R&D Tax Credit?

  • Develops or designs new products or processes
  • Enhances existing products or processes
  • Develops or improves on existing prototypes and software

How do I claim the R&D Tax Credit?

According to the IRS, R&D expenditures for new products are generally capital expenses.  However, you can choose to deduct these expenditures as current business expenses.  You may use one of the following methods for R&D expenses:

  • You may deduct your R&D expense in the tax year in which you paid or incurred it, or
  • You may amortize such expenses over a period of not less than 60 months

You must charge to a capital account any R&D expenses that you do not deduct in the current year, nor defer and amortize.

Qualified Research Expenditures (QREs) are costs associated with investments in innovation and improvements that go well beyond product R&D.  Investments made in process improvements may qualify.

Many manufacturers invest far more in improving their processes than in developing products.  For example, wages paid to line employees involved in research activities on process improvements may be considered a QRE.

Other areas in which QREs exist in the company include quality assurance, engineering, product design, and in-house software development. 

For more information

Will pursuing the credits pay off for your company?  If your company invests in advancing your products or you work at improving the innovations of your processes, your pursuit of the credit could yield significant current and future year tax savings. Contact your tax advisor for more details regarding R&D and QRE Tax credits and the benefits they offer.