What is the R&D Tax Credit?

The Research and Development Tax Credit is an incentive designed to reward U.S. companies for creating and keeping technical jobs in the U.S. The R&D credit is based on Sections 41 and 174 of the Internal Revenue Code (IRC). The technical name for the credit is the “Credit for Increasing Research Activities” per IRC Section 41. It was created in 1981 under the Reagan administration to help strengthen U.S. manufacturing against global competition.

From a practical standpoint, the R&D credit allows taxpayers to calculate a lucrative reduction in their tax liability based on qualifying wages, supplies, and contractor expenses that are associated with R&D activity in their business operations. R&D credits can be captured retroactively for up to three years, and R&D credit carryforward credits can be used for up to 20 years.

Since 1981, the credit has enjoyed bipartisan support in congress, and has undergone many taxpayer-friendly changes. In 2015, the Protection Against Tax Hikes Act made the credit a permanent part of the tax code, and made the credit applicable to offset payroll taxes for eligible start up companies. Most recently, in 2022, there is a proposed bill in congress to double the R&D credit for qualifying businesses. The driving force behind this proposed bill is to stimulate domestic R&D spend in the face of challenging global economic conditions.

This page was last updated by Steven Jefferies