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Purpose of Research & Development Tax Credits
In an effort to incentivize companies to remain competitive and continue technological advancements, the federal government created Research and Development (R&D) tax credits, also known as the Research and Experimentation (R&E) tax credit. Many state governments, including Arizona, created their own tax credit programs where certain activities receive tax credits. The credit encourages companies to increase their efforts and spending on research and development activities over time by reducing tax liabilities.
What are qualifying R&D activities?
Some day-to-day operational activities may qualify for R&D. Examples of some qualifying activities include manufacturing products, developing new products or processes, improving existing products or processes, creating more reliable software or techniques, constructing prototypes or physical models for testing and evaluation purposes, and developing new technologies.
It is easier for companies to qualify for acceptable R&D activities. Any company, regardless of size or nature, that develops new or improved products or processes, may be eligible to receive R&D. In fact, many companies that qualify make products they do not design.