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USA R&D tax credits scheme

The Research and Development tax credit USA is designed to incentivise US-based research and development activity. The 2015 Protecting Americans from Tax Hikes (PATH) Act both increased the scope of the tax credit in the USA to include start-up companies and also made this a permanent US tax credit.

The US R&D tax credit rules enable businesses of all sizes to reduce their federal income tax for expenses incurred on qualified research activities.

What are the benefits of US R&D tax credits?

Source Advisors has helped companies claim over $1.6 Billion in credits to date, enabling innovative companies in the US to benefit from cost savings which can increase cash flow by reducing tax rates. US companies can claim R&D credits for open tax years going back 3-4 years.

How to claim the US R&D tax credits

A US taxpayer can claim their R&D tax credit by filing IRS Form 6765, credit for increasing research activities (for the year in which the qualified expenses were paid or incurred). In the USA R&D tax credit can be claimed either on their timely filed tax return including extensions for a given year or it is possible to amend prior returns, typically credit can be claimed for the previous 3 years.

The Four-Part test must be met for any US R&D tax credit claim

Having the right documentation is essential when defending an R&D tax credit claim. In order to qualify for an R&D activity, the activity must meet the Four Part test which includes:

  1. Permitted purpose – where the purpose of the research activity is defined as improving the performance, reliability, functionality, or quality of a product or software.
  2. Technological uncertainty – establishing that there is uncertainty in the way the product of software should be developed or designed.
  3. Process of experimentation – this is the period of trial and error that attempts to eliminate the technological uncertainty.
  4. Technological in nature – the activity applies principles of engineering, physical sciences, biological sciences, or computer science.


The types of research and development activity that qualify for US R&D tax credits include:

  • Design and development of new or improved software applications
  • Development of conceptual designs and defining requirements and specifications for new or improved products
  • Development of tooling, fixtures, and dies
  • Building and testing prototypes
  • Development of production processes and equipment
  • Evaluation and testing of new materials for product development
  • Development of data centres, big data, and data mining tools
  • Integration of APIs and other technologies
  • Development of financial or pricing models
  • Development of firmware
  • Network hardware and software development and optimization
  • Developing simulators
  • Development of risk management systems
Qualifying expenditure can include the following when it relates to a qualified research activity:
  • Employees or sub-consultants performing research
  • Raw materials
  • Consumable supplies during development
  • Cloud computing services related to development operations
A start-up business in the US can also qualify to offset payroll taxes if each of the following criteria is met:
  • 5 years or less in revenue
  • Less than $5 million in revenue in the current year
  • Conducted qualifying research activities and expenditures

Source Advisors can assess a company’s federal R&D tax credit opportunity and also determine any state R&D tax credit availability. Many states offer their own R&D tax credits, often being more generous than the federal credit. Our US team of experienced CPAs, attorneys, engineers, and technology experts helps innovative companies navigate their options.

Check if your state offers R&D tax credits on this map.

Why Source Advisors

Our team has the in-depth technical and industry expertise to manage each stage of the R&D process from initial assessment through credit documentation and audit defense.

  • In the US, Source Advisors has provided specialised tax services to accountants and their clients for over 40 years
  • Over 10,700 R&D claims completed in the US
  • Over $1.6 billion in credits claimed in the US
  • We offer a team of over 250 dedicated R&D professionals in both the UK and US, including CPAs and attorneys. 

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US SMEs ability to offset their Alternative Minimum Tax (AMT) liability

Since 2015, The Protecting Americans from Tax Hikes (PATH) Act has allowed innovative SMEs in the US to offset their Alternative Minimum Tax (AMT) liability with the R&D tax credit for taxable years beginning on, or after, 1 January 2016.

Before that date, qualified companies could be limited by AMT and unable use the full 100% of their R&D tax credit. Instead, any excess credits had to be carried back and then forward. However, the PATH Act makes it possible for small businesses to offset their AMT through the R&D tax credit without limitation.

How to calculate the US R&D tax credit?

In the US there are two possible methods to calculate the R&D tax credit: The Regular Credit (RC) method and the Alternative Simplified Credit (ASC) method. There isn’t a one size fits all, with both methods having distinct advantages and disadvantages. Our team at Source Advisors can determine the best calculation method based on your specific situation each year.

There are four sections of IRS Form 6765 that must be evaluated:

Section A – for any US business attempting to claim the R&D credit using the RC method

Section B – for any US businesses electing to use the ASC calculation method

Section C – further documentation based on the specific business setup

Section D – required for any small business that falls under the payroll tax election

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