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Background on the R&D Tax Credit

In a temporary effort to boost the economy in 1981, the federal government sought to use the passage of the Research and Experimentation tax credit to reward businesses for investing in research.

With the rapid changes in technology in the past decades, companies across multiple industries have seen increasing challenges to constantly innovate their products or processes to compete across a global economy. Business owners small and large understand the expensive and time-consuming risks that drastic innovations pose and thus, often failing– yielding no financial return on investment.

Recognizing the need to create jobs domestically and maintain global economic competitiveness, Congress has extended the R&D tax credits more than a dozen times over subsequent years, finally making them permanent with the passage of the PATH Act of 2015. In addition to becoming permanent, the Protecting Americans from Tax Hikes act expanded R&D credit provisions to start-ups and small businesses. The R&D tax credit is now available to any U.S. business that spends time and resources on new development, improvements, or technological advancements in effort to improve upon its products or processes. The credit could also be available to American Business owners that have improved upon the performance, functionality, reliability, or quality of existing products or trade processes.

Pathway to the

PATH Act of 2015

  • 1981

    Original Enactment of the Federal R&D Tax Credit

    This credit was developed to reward businesses for investing in their research. Activities qualifying for the credit were limited to creating or producing a product or process that was new to the world. The definition of the research was further defined under Sect. 174 (Discovery Rule); due to this definition, only a small percentage of companies were able to qualify.

  • 2001

    “Discovery Rule” is eliminated

    The regulation change to eliminate the “Discovery Rule” from R&D tax credit qualification requirements now benefits businesses as it alters the activities that now qualify for the credit.

  • 2006

    The Alternative Simplified Credit (ASC) is enacted.

    This provided additional flexibility to business in calculating credit amounts.

  • 2014

    Finalization for Sect 174

    Controlled group credits allocation amongst members was changed with the finalization for Sect 174; temporary regulations also allow ASC on amended returns for years a taxpayer had not previously claimed a credit.

  • 2015

    Passing of the Protecting Americans from Tax Hikes Act (Path Act)

    The R&D tax credit became permanent after the passing of the Protecting American from Tax Hikes Act (PATH Act).

    The Alternative Minimum Tax (AMT) turn off was enacted for businesses with $50 million or less in gross receipts allowing for more businesses to take advantage of the R&D tax credit.

  • 2016, 2018

    Tax reform legislation is implemented

    The R&D Tax Credit remains one of the most lucrative tax incentives for U.S. businesses.

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