Research & development (R&D) is a central aspect of many businesses. It’s a worthwhile investment—discovering new technologies yields immense benefit to a business. However, research also benefits society overall. Thus, as an extra incentive, the U.S. government provides a tax credit for certain R&D activities.
These credits are nearly as good as money in the business’s pocket—they offset taxes dollar for dollar, and can be carried forward or back to other tax years. Furthermore, given the vast amounts businesses invest in R&D, these tax credits can be very large.
In one leading case, a corporation spent $30 million developing a new computer system.[1] The resulting tax credit could have been worth millions—but the corporation lost the case.
Indeed, despite the potential value of the Research credit, it is one of the top five uncertain tax positions in the U.S.[2] This is because the test for whether a business can get the credit is complicated, involving several steps, each with multiple sub-elements.
We will walk through these steps, beginning with the requirements for qualified research activities. This includes a four-part test, and some activities are excluded outright. Next, we will examine the requirements for qualified research expenses. Finally, we will look at how legal technology can help, by guiding users through the issue in a way that validates professional intuition while navigating complex legal topics.
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