Research and development is an integral part of many companies’ operations. These processes seek to enhance existing products or discover new ones through ongoing research.

In addition to creating brand-new products and services, research and development (R&D) is often undertaken to enhance the qualities or characteristics of existing products and technologies.

Since the IRS offers an R&D tax credit to companies, there is an additional incentive to aggressively pursue research and development.

Key Takeaways

  • R&D can give companies a competitive advantage in their respective markets by enabling them to develop new products or improve existing products.
  • Research and product development is an expensive process, but, starting in 1981, the IRS began offering the R&D tax credit. This tax credit helps businesses, even start-ups, shoulder the high costs incurred by R&D.
  • For the most part, businesses themselves are the ones that fund the majority of their R&D, but there are other organizations and institutions that contribute funds towards research and development.
  • In 1980, the industrial sector surpassed the federal government as the largest source of research and development funding. Over the last few decades, the share of R&D funding provided by the industrial sector has continued to increase.
  • Receiving the maximum possible tax return from the IRS for R&D activities can be difficult. Tri-Merit Specialty Tax Professionals is here to make sure that your company maximizes its savings with the R&D tax credit.

Why Should Companies Invest in R&D?

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Research and development is the first step toward the creation of new products and technology. As you might guess, it’s a two-part process. The research part of the process can either be basic research or applied research.

Basic research considers the scientific principles relative to a product, whereas applied research makes use of basic research in a practical setting. The development component seeks to capitalize on everything learned from research, so as to improve a product or make a new product marketable.

One of the biggest reasons to invest in research and development is the potential for gaining a competitive advantage over rivals. By developing new products or improving existing products, it is possible to differentiate your company from the competition and gain a larger market share of your target audience.

R&D often leads to the discovery of entirely new products, especially in industries involving machinery, computer hardware, and pharmaceuticals.

Another great reason to invest in an R&D department is the R&D tax credit, which the IRS began offering in 1981. Even startup companies can take advantage of this tax credit when spending money on R&D and hiring additional employees for that purpose.

These tax credits can be used to offset any tax liabilities your company has, and it also comes with a substantial carry-forward provision. Companies have made large profits in a very short period of time by selling the ideas they’ve discovered to larger firms with greater resources.

While your company may not participate in R&D with the idea of selling ideas to a larger company, it happens often enough in the business world. Especially when some truly valuable discoveries have been made through R&D.

How Are R&D Expenditures Funded?

Businesses themselves provide most of the funding for research and development in the United States, but there are other organizations that contribute to the overall effort as well.

The federal government provides the largest share of funding for basic research activities in the U.S. The general institution of higher education is the second-largest funder of basic research.

Since the year 2000, federal funding for research and development has steadily increased, although the overall proportion of government funding compared to private sector funding has actually declined.

To gain more perspective on the level of involvement of these three primary players, consider the statistics available for R&D funding in a recent typical year.

In the year 2017, there was a total of $548 billion spent in the U.S. on research and development. Of that figure, 73% was funded by private and public businesses, while 13% was funded by colleges and universities. The federal government contributed 10%.

Only about 17% of all research and development efforts go toward basic research, while a full 80% is allocated toward applied research. This makes perfect sense, given the fact that businesses are focused on creating new or improved products and technologies.

Over the most recent 20 year span, funding for R&D by the business sector increased from 19% to nearly 30%, demonstrating the commitment of business to research and development.

Of the funding provided by businesses, the vast majority comes from the U.S. industrial sector. That has been true for the last two decades.

In 1980, the industrial sector surpassed the federal government as the largest source of research and development funding. Every year since then, the share of R&D funding contributed by industry has grown. Each year the percentage of its contribution has correspondingly escalated.

From 1975 to 1987, federal investment in research and development continued to grow at a large rate, but in the period after that, industry began taking over as champion of research and development funding.

There has been a resurgence of industry in this country over the past several decades. Economic growth has been fairly strong, and inflation has been kept low. That has contributed strongly to industrial growth. In addition to these factors, industries themselves have pursued strategies that have led to their resurgence in the U.S.

Part of this resurgence has been triggered by the industry’s ability to develop new processes and products and bring them to market in a beneficial manner.

Industry has managed to capitalize on consumers’ changing needs and demands, such that entirely new markets have been created. This has supported the resurgence of industry in the United States.

With industry once again becoming prosperous, it’s only natural that the sector as a whole would take on greater responsibility for funding critical R&D projects.

Working with the Right R&D Tax Credit Partner

When you choose a strategic partner to work with, so as to obtain the maximum R&D tax credit, you’ll want to align your business with a firm you can trust. We understand that kind of confidence doesn’t come easy and that it has to be earned.

Tri-Merit Specialty Tax Professionals is that company. Contact us today so we can demonstrate our expertise and knowledge of tax law, in relation to your company’s R&D program. We hope you will then become our newest satisfied customer.

Take a look at our specialty tax services!