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Research and Development Tax Credit – The Evolution

Research and Development Tax Credit is a tax incentive given to small businesses in the US that are involved in either developing new products, materials, or processes or modifying the ones that exist. It lets eligible companies claim these R&D expenses.

Let us see how it all started.

The Beginning

The federal Research and Development Tax Credit came into being in 1981. This was more like a solution for the economic slowdown and job outsourcing that took place at that time. This tax incentive was developed to benefit businesses in the US. The aim was to make sure that the technical jobs never left the country and all the industries abounded in innovation.

In 1981, the activities that qualified for the tax claim were only restricted to creating a product or process that was never there before. In other words, it should be a ‘new’ product/process. This rule was called the ‘Discovery Rule’.


The first and foremost thing that was proposed to be removed in 2001 was the “Discovery Rule”. This rule that was mandatory for tax credit was removed in 2003. The rule of the product being new to the world was changed to being new to the taxpayer. The move was immensely beneficial to business owners as now more companies were eligible to get the tax incentive.


In the year 2006, there was the enactment of the Alternative Simplified Credit (ASC). It provided businesses the freedom to calculate credit amounts and alter the baseline calculations for the tax incentive.


The proposal of changing the way of group credits being allocated among members came in 2013. By 2014, the changes came into effect. According to them, if supply expenses are incurred in developing the pilot model, its final disposition is not relevant. Apart from this, time-being regulations allowed ASC (Alternative Simplified Credit) on returns that were amended for the years that the business owner did not claim the credit.


By the end of 2015, the Protecting Americans from Tax Hikes Act (PATH Act) was passed. The R&D Credit became a permanent part of the US tax code. In addition to that, there was the enactment of Payroll Tax Credit enabling businesses with less than $5 million in gross receipts in the tax year and less than 5 years of gross receipts from the tax year, to utilize the R&D tax credits to offset up to $250,000 per year in employer social security taxes.



The legislation eased AMT restrictions for S-corps and C-corps. It became one of the most attractive tax incentives for businesses in the US and still is.

Over the years, there have been a lot of amendments to the Research and Development Tax Credit. The aim has always been to benefit small businesses and startups by supporting them to create innovative products and technologies and spur job creation. Time and again there have been modifications to the eligibility criteria so that more companies can claim the credit and benefit from it.

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