Research and Development Case Study


Who Can Benefit From The Research & Development Credit?

The Research and Development Tax Credit is available to companies that invest in the development of new or improved products, manufacturing processes, and software. The Credit was initiated by Congress in 1981 as an incentive to American businesses to increase innovation. Qualification for the Credit depends on the nature of the activities performed by a company and the expenditures incurred for those activities.

Research Tax Credit Case Study
Following is a case study that presents a fictitious company in the food service industry, some of whose activities qualify for the Credit. In the current tax year, Green, Inc. undertook an effort to develop a new line of cookware using a new material that works like normal cookware and is biodegradable, so it causes no pollution when disposed of at the end of its useful life. Green, Inc. incurs the following costs in the development activities:

Qualifying Research & Development Activities

  • Activities must involve the development of new or improved products, processes, or software
  • There must be uncertainty as to the design of the new product, process, or software
  • Testing alternative methods in an attempt to achieve a desired result
  • The activities must be technological in nature, making use of the principles of the physical sciences

Qualifying Costs Associated With The Above Research Activities Include:

  • Wages subject to income tax withholding paid to employees to perform qualified activities
  • 65% of amounts paid to non-employees to perform qualified activities (contract research)
  • Supplies (non-depreciable property) used to build prototypes and other tangible items used in the development process

Research Tax Credit Study Results
The calculation of the Credit requires several other attributes not included in this case study. However, in this case study, the current year federal Credit for Green, Inc. could be up to $30,000.