Research and Development Tax Credit

How does the Research and Development Tax Credit affect Florida businesses?

The Research and Development (R&D) Tax Credit is a federal incentive to encourage innovation and technological advancements in the United States. This tax credit is a valuable economic development tool in Florida that can benefit various businesses, particularly those in technology-driven industries. By investing in research and development, Florida companies can claim a dollar-for-dollar reduction in their federal income tax liability, thus promoting growth and competitiveness.

The R&D Tax Credit allows businesses to recoup a portion of their qualified research expenses (QREs), such as employee wages, contractor expenses, and supply costs associated with R&D activities. The credit’s potential impact on Florida businesses is significant, as it helps offset innovation costs, fosters job creation, and drives economic growth within the state. Companies taking advantage of the R&D Tax Credit can reinvest these savings in their operations, resulting in increased productivity, expanded market reach, and improved competitiveness.

Need help regarding economic development incentives? Schedule your consultation today with a top economic development attorney.

Which federal laws and regulations apply to the R&D Tax Credit?

The R&D Tax Credit falls under federal law, specifically, Internal Revenue Code (IRC) Section 41. This federal provision outlines the eligibility requirements and calculation methods for claiming the R&D Tax Credit. In addition to IRC Section 41, taxpayers should refer to the relevant Treasury Regulations, particularly 26 CFR §1.41-1 through §1.41-9, for guidance on the tax credit’s implementation and interpretation.

Which Florida businesses qualify?

Florida businesses must meet the following requirements:

• Engage in Qualified Research Activities: Companies must perform activities that involve the development or improvement of a business component, such as a product, process, or software.
• Pass the Four-Part Test: The R&D activities must satisfy a four-part test:

1. Permitted Purpose: The research activities must help develop a new or improved product, process, software, technique, invention, or formula.
2. Technological in Nature: The research activities must fundamentally rely on principles of engineering, computer science, physical or biological sciences, or other similar disciplines.
3. Elimination of Uncertainty: The research activities should aim to discover information relevant to eliminating technological uncertainties about the capability, method, or design. Accordingly, they must also seek to develop or improve the product, process, or software.
4. Process of Experimentation: The research activities must involve a systematic process of experimentation, which can include modeling, simulation, testing, or other methods to evaluate and refine the design, capabilities, or practices of the business component.

• Incur Qualified Research Expenses: Businesses must have QREs, such as wages, supplies, and contract research costs associated with the R&D activities.
• Document and Substantiate the R&D Activities: Companies must maintain proper documentation to support their R&D activities and related expenses.

When a set of facts is appropriate to meet the requirements of the Research and Development Tax Credit, there are many paths a claimant may take. We are value-based attorneys at Jimerson Birr, which means we look at each action with our clients from the point of view of costs and benefits while reducing liability. Then, based on our client’s objectives, we chart a path to seek appropriate remedies.

To determine whether your unique situation may necessitate litigation, please contact our office to set up your initial consultation.

What are the strategic benefits for qualifying Florida businesses?

• Financial Savings: The R&D Tax Credit provides a dollar-for-dollar reduction in a company’s federal income tax liability, freeing up funds for reinvestment in the business.
• Enhanced Innovation: By offsetting research and development costs, the tax credit encourages businesses to invest in innovative projects, leading to new products and services.
• Increased Competitiveness: With additional resources to invest in R&D, companies can maintain a competitive edge in their industries and expand their market reach.
• Job Creation: The tax credit can indirectly contribute to job creation, as businesses that innovate often require a larger workforce to manage and support new projects.
• Attraction of Investors: Companies that take advantage of the R&D Tax Credit demonstrate their commitment to innovation, making them more attractive to potential investors.

Please contact our office to set up your initial consultation to see what actions or defenses may be available for your unique situation.

Frequently Asked Questions

1. How do Florida-based businesses claim the Research and Development (R&D) Tax Credit?

Florida-based businesses must file Form 6765, “Credit for Increasing Research Activities,” along with their federal income tax return. Companies must calculate their tax credit based on QREs incurred during the tax year and provide detailed documentation supporting their claim. It’s essential to consult with a tax professional or an R&D tax specialist to ensure accurate calculations and adherence to guidelines.

2. Can small businesses or startups in Florida benefit from the R&D Tax Credit?

Small businesses and startups in Florida can benefit from the R&D Tax Credit. In fact, eligible small businesses with less than $5 million in gross receipts and startups with no more than five years of operation can use the tax credit to offset payroll taxes up to $250,000 per year. This provision helps new or small businesses to leverage the R&D Tax Credit even if they have little to no income tax liability.

3. Are there any industry-specific requirements for claiming the R&D Tax Credit in Florida?

The R&D Tax Credit is industry-agnostic, and businesses from various sectors, including manufacturing, technology, software, agriculture, and pharmaceuticals, can benefit from it. The key is to ensure that the research activities meet the four-part test and involve developing or improving a business component. Additionally, businesses must incur QREs and maintain proper documentation to support their R&D activities.

Have more questions about an economic development-related situation?

Crucially, this overview of the Research and Development Tax Credit does not begin to cover all the laws implicated by this issue or the factors that may compel the application of such laws. Every case is unique, and the laws can produce different outcomes depending on the individual circumstances.

Jimerson Birr attorneys guide our clients to help make informed decisions while ensuring their rights are respected and protected. Our lawyers are highly trained and experienced in the nuances of the law, so they can accurately interpret statutes and case law and holistically prepare individuals or companies for their legal endeavors. Through this intense personal investment and advocacy, our lawyers will help resolve the issue’s complicated legal problems efficiently and effectively.

Having a Jimerson Birr attorney on your side means securing a team of seasoned, multi-dimensional, cross-functional legal professionals. Whether it is a transaction, an operational issue, a regulatory challenge, or a contested legal predicament that may require court intervention, we remain tireless advocates at every step. Being a value-added law firm means putting the client at the forefront of everything we do. We use our experience to help our clients navigate even the most complex problems and come out the other side triumphant.

If you want to understand your case, the merits of your claim or defense, potential monetary awards, or the amount of exposure you face, you should speak with a qualified Jimerson Birr lawyer. Our experienced team of attorneys is here to help. Call Jimerson Birr at (904) 389-0050 or use the contact form to schedule a consultation.