Tax Credit for Research and Development in the U.S.

One of the greatest opportunities to reduce tax liability that companies established in the U.S. can benefit from is the credit related to investments in research and development, provided for in Section 41 of the Internal Revenue Code. Such benefit is applicable to companies, regardless of size, provided that they meet the requirements listed below:

  • Development or design of new products or processes;
  • Improvement of existing products or processes;
  • Improvement by means of prototypes and software;
  • Engagement of designers, engineers or scientists for innovation projects.

Companies with less than five years of income and annual revenue under $5M, that are not recording profit, can also benefit from credit for research and development, with the possibility of applying such amount for deduction of payroll-related charges (Federal Insurance Contribution Act – “FICA”)

Some examples of supporting documentation:

  • Payroll record;
  • Account ledgers;
  • Project detailing;
  • Other documents drawn up in the ordinary course of business.

The following expenses qualify for research and development credit:

  • Salaries;
  • Subcontractors;
  • Raw material and related materials;
  • Costs with technologic equipment.

It should be mentioned that only expenses incurred in the U.S. qualify for research and development credit.

For more details on the qualification of R&D credit in the U.S., contact

Written by Michel de Amorim, partner at Drummond Advisors


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