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The R&D Tax Credit can be a valuable tool for companies that conduct R&D, including the invention of patented products and processes. It provides a 14% credit on qualifying expenditures.

How do you qualify – research activities must satisfy a four-part test:

  • Purpose: the objective of the activity must be to create a new or improve an existing business component in terms of functionality, performance, or quality. A business component is any product, process, technique, invention, formula, or computer software that the taxpayer intends to hold for sale, lease, license, or actual use in the taxpayer trade or business.
  • Elimination of uncertainty: A degree of uncertainty must exist concerning the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability of development or improvement, method of development or improvement, or the appropriateness of the business components design.
  • Process of experimentation: The taxpayer must undertake a process of experimentation designed to evaluate one or more alternatives to achieve a result.
  • Technological in nature: the experimental process must fundamentally rely on the principles of the “hard science”, including physical, biological sciences, engineering, or computer sciences.

Intellectual Property/Patents, Innovation, Can Be Used as a R&D Tax Credit Calculation

One of the rationales for patents is that they stimulate economic and technological development and promote competition by creating a financial motivation for invention in return for the disclosure of the invention to the public. The potential of the patent system has been widely recognized in the context of dynamic innovation activities.

In view of the rapid technological innovation and the social and economic challenges, the function, value, and impact of the patent system need to be constantly adjusted and implemented so that the optimal balance between the right holder, new entrants to the market and the public at large is achieved.

To foster R&D in new technologies, such as information and communication technologies and biotechnology, the patent system needs to be shaped to respond to the challenges arising swiftly and strategically from those new technologies. Furthermore, to support a comprehensive and complex technological development, it is essential to strengthen public R&D activities, including those in universities, and promote better collaboration between the private and the public sectors. It is important to set up policies which provide a balance by offering both incentives to stimulate R&D and ensure a competitive environment for pioneers, for down-stream researchers and for producers at the end of the value-added chain.

One of the major functions of the patent system is the dissemination of technical information. Patent information is a valuable and comprehensive source of technical, commercial, and legal information that can be used directly for scientific and experimental purposes and as a basis for stimulating the adaptation and improvement of the technology described in patent documents immediately after their publication. Recognizing the importance of the dissemination of technical information, a growing number of IP offices and organizations are using the Internet to offer access to their patent documents’ databases.

The cost and legal fees for IP/patents are considered an R&D expenditure. Note that the R&D costs required to develop the idea being patented cannot be included in the capitalized cost of a patent. These R&D costs are instead charged to expense as incurred; the basis for this treatment is that R&D is inherently risky, without assurance of future benefits, so it should not be considered an asset.