Federal R&D Tax Credit

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The federal government rewards taxpayers with a significant income tax credit for increasing research and experimental (”R&E”) spending. These R&E tax credit benefits taxpayers who design and manufacture tangible or intangible products, provide technical consulting services, or develop internal-use software.

The federal research tax credit is made up of the regular research tax credit, alternative incremental research credit, alternative simplified credit, basic research tax credit, and credit for energy research.

Any one taxpayer may claim either the regular tax credit, the alternative incremental tax credit, or the alternative simplified credit. In addition, the taxpayer may also claim the basic research credit and the credit for energy research. Here is a summary of each of these research tax credits (click on the links to read more about each credit):

• Regular research tax credit - the regular research tax credit equals twenty percent of the taxpayer’s current year qualified research expenses above its base amount.
• Alternative incremental research credit - the alternative incremental research credit equals three to five percent of the taxpayer’s current year qualified research expenses above its average annual gross receipts in the previous four tax years.
• Alternative simplified credit - the alternative simplified credit equals twelve percent of the taxpayer’s current year qualified research expenses above fifty percent of its average qualified research expenses in the previous three years.
• Basic research tax credit - the basic research credit equals twenty percent of the taxpayer’s qualified research expenses resulting from contracts with certain non-profit organizations above its qualified organization base period amount.
• Credit for energy research - the credit for energy research equals twenty percent of the taxpayer’s qualified research expenses paid to certain non-profit entities for certain types of energy research.