Research and Development Expenses in Product Development

Being an entrepreneur is devoting yourself to your passions. However, becoming an entrepreneurial success takes more than just a great idea, and understanding unconventional sources of savings, like overlooked tax deductions, can ultimately make or break the research and development (R&D) process of your next product. Every innovation needs proper market research, design, and prototyping. One easy way to make sure you can afford it all is to maximize your money. But are R&D expenses tax deductible?

Capitalizing research and development expenses is available to companies of all sizes, whether you are an experienced business owner or new business, a company that designs, develops, or improves products, processes, techniques, formulas, inventions, or software you might be eligible. This government-sponsored program, at both the state and federal level, provides incentives for US companies to stimulate research and development for all industries and encourage companies to work together to transform the economic landscape.

Are R&D expenses tax deductible?

The IRC Section 174 details R&D friendly tax laws enacted by Congress and its incentive for people looking to create new products and technologies. The language in the law is very straightforward; it states that: “a taxpayer may treat research or experimental expenses which are paid or incurred by him during the taxable year in connection with his trade or business as expenses which are not chargeable to capital account.” This means that an inventor’s total research and development expenses may be deducted from their gross income. Even better the R&D Tax Credit regulations allow eligible taxpayers to “look back” to all open tax years, usually three years and the current year, for potential research credits that were never claimed.

Research and development expenses usually fall under capital expenses, and, as such, aren’t tax deductible; however, the above tax law allows for certain exemptions. The IRS considers the ​cost​ of research and development to be a necessary part of the process for inventors. The hope is that these tax deduction ideas will help with ​product​ development investment and realization. Likewise, your tax liability must be more than the credit in order to qualify for the full amount. If you have a tax credit of $20,000 and a tax liability of $18,000, you will be only getting the $18,000 credit. The extra $2,000 is non-refundable.

Entrepreneurial product developers looking to capitalize from the R&D credit qualified expenses can take advantage of these incentives and put money back in your wallet. This will ultimately help to bring your product or service to market.

For further information and details on the IRC Section 174  or the  R&D credit qualified expenses here are some other helpful articles and videos that will set you on the path of developing your world-changing product.

The R&D Tax Credit Is Not Just For Scientists

Louisiana Economic Development

Research & Development Tax Credits Webinar

Changes to R&D 2018