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R&D Tax Credit Frequently Asked Questions
Introduction
Whether you're a business owner wondering if you qualify or a CPA looking for technical confirmation, this page covers the most common R&D tax credit questions. Many companies miss this credit simply because they don't realize how broadly it applies — Firestone helps close that gap.
R&D Tax Credit Basics
How much is the R&D credit worth?
The federal R&D tax credit is one of the most lucrative tax incentives out there. It is a dollar-for-dollar offset against income taxes, generally ranging between 5% and 10% of eligible R&D expenses. Many states offer R&D tax credits of varying sizes — businesses in certain states can receive tax credits totaling 20% of their R&D expenses.
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What is the purpose of the R&D tax credit?
The R&D credit was created to incentivize companies to invest money into the development of new and improved products. The government realizes that new products lead to increased tax revenues and that an incentive like this helps keep high-paying technical jobs in the U.S., resulting in U.S. companies and the U.S. economy as a whole remaining competitive both domestically and internationally.
Is the R&D tax credit new?
No. The R&D tax credit has been around since 1981. Since then, it has been expanded many times, and in 2015 the Protecting Americans from Tax Hikes (PATH) Act made the credit permanent. The R&D tax credit is currently more popular and heavily used than ever, as more companies in a wide array of industries are investing in new technology.
Can the R&D tax credit also reduce state income taxes?
Yes, many states offer their own R&D tax credits for R&D expenses incurred within that state. The value of state R&D tax credits varies widely, but it generally ranges between 3% and 15% of state-specific eligible R&D expenses.
Qualification Questions
Must companies be in a specific industry to benefit?
No—companies in a wide range of industries are eligible. This credit is not only for technology companies or manufacturers!
Is the R&D tax credit only for large companies?
No! Companies of any size are eligible, from sole proprietorships with no employees to Fortune 50 companies with more than 100,000 employees. Unfortunately, while most eligible large companies already claim the R&D tax credit, many eligible small companies fail to take advantage of this valuable tax benefit.
Can companies that don't develop new products take advantage of this credit?
Quite possibly! In today’s business environment, more companies than ever before are eligible. Any company that invests in new or improved production processes, computer software, techniques, designs, formulas, or products can take advantage of the R&D tax credit. Examples of non-obvious companies that can qualify are:
An HVAC company that designs and engineers the HVAC systems they install
A bank that invests in developing custom loan origination or servicing software
A contract manufacturer that develops the process to fabricate a customer’s parts, even if the customer itself handles designing the parts
Many businesses underestimate their qualifying activities. Firestone can help evaluate whether your projects and expenses may qualify.
Must companies generate profit and income taxes to take advantage of the credit?
Not necessarily. The credit isn't refundable and generally can't reduce income taxes below $0, but unused credits carry forward up to 20 years. Startups in their first five years, with under $5 million in current-year revenue, can offset up to $250,000 of FICA payroll taxes with the credit regardless of profitability.
Industry Questions
Does my industry qualify?
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Documentation Questions
What types of expenses are eligible?
Wages of U.S. employees involved in design, development, testing, or other research activities
Payments to U.S. vendors involved in these activities
Materials used during these activities
Payments to lease cloud-based software development environments
Must companies have specific documentation "proving" R&D to claim the credit?
No. There is no specific record-keeping requirement, and many court cases have confirmed that R&D credits can be supported by testimony that reasonably demonstrates a factual basis for claiming the R&D tax credit.
Must companies implement special systems or accounting procedures to claim the credit?
No. Firestone works with companies to develop support for any R&D tax credits claimed without implementing expensive systems or time-consuming new procedures. We focus on leveraging existing records and data to maximize efficiency and minimize intrusion.
What forms do I have to file to obtain the R&D tax credit?
The R&D tax credit must be claimed on a company’s income tax return. The tax credit can be claimed on original tax returns, and up to three years’ of previously filed tax returns can be amended to claim the R&D tax credit! Any R&D credits claimed reduce the amount of income taxes due.
Can companies calculate and claim this credit on their own?
The R&D tax credit is one of the most complex and ambiguous items in the tax law. Enlisting experts who understand this law and how to apply it to your business is crucial to calculating and claiming a valid tax credit. Additionally, companies that claim the credit on their own often fail to include all eligible expenses and end up with smaller credits than they deserve.
CPA Questions
Does Firestone compete with my accounting firm?
No. Firestone doesn't provide tax preparation, assurance, or accounting services, so there's no overlap with what you already do. We identify opportunities, complete the technical documentation, and help clients maximize available incentives, while you as their primary CPA stays the trusted advisor on record. We don't compete for your core business.
What's the process for referring a client to Firestone?
LINK: Learn About Our CPA Partnership Program →
How Firestone Helps
At Firestone, we use a no-risk, three-step process — Investigate, Calculate, Document — to help companies obtain the maximum R&D tax credit available.
LINK: Read about our process →