What is the Research and Development Tax Credit?


Quick Answer

The Research and Development Tax Credit is a tax incentive to encourage businesses and companies of all sizes to conduct research and development in the United States, according to AlliantGroup. When a company invests in certain research and development activities, it qualifies for the credit, which lowers the amount of tax the company pays, according to the Tax Foundation.

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Full Answer

The Internal Revenue Service typically considers research and development expenditures as capital expenses, but its research and development tax credit rules allow qualified business and corporate taxpayers to deduct their expenditures as business expenses, according to the IRS. The taxpayers can claim the research and development credit against their tax liability and combine the credit with other parts of the general business credit.

Companies with laboratory scientists are not the only ones eligible to take advantage of research and development tax credits, notes AlliantGroup. Based on the Internal Revenue Code definition of research and development, many businesses and industries can qualify for the tax credits. The manufacturing, architecture, food and beverage, tool and die, and agriculture industries are among those having common practices that make them eligible for the tax credits.

Research and development tax credit supporters contend the credits encourage research that typically does not produce short-term economic benefits, but does produce long-term societal benefits, explains the Tax Foundation. Tax credit opponents contend that instituting the credits, especially at the state level, gives government agencies the power to decide what research is beneficial and that the credits make the tax system more complicated.

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