Alabama doesn’t offer a state research and development (R&D) tax credit program, but qualifying Alabama companies can apply for a federal R&D tax credit.

R&D credits serve as great rewards for innovative companies, and more than 25 states offer some kind of R&D tax credit program. State tax credit programs can be used in addition to a federal R&D tax credit. Keep reading to learn more about Alabama R&D tax credits and how R&D credits can

Does Alabama Offer a State R&D Tax Credit Program?

Unfortunately, if you run an innovative business in the Yellowhammer state, you won’t be able to apply for a state R&D tax credit. Currently, Alabama doesn’t offer such a program, but that could change in the future. In the meantime, you can always apply for a federal R&D tax credit. Let’s examine this credit program and how it can benefit you.

The Federal R&D Tax Credit Program

Established in 1981, this credit program is designed to incentivize innovation throughout the nation. No matter what state your business is headquartered in, you can apply for this credit if you qualify. Now, it may not surprise you to learn that many large companies take advantage of this program, but can a family business utilize R&D tax credits? This answer is ‘yes’ as long your business has:

  • Developed a new product/process and/or improved upon existing functionality
  • Encountered a level of uncertainty in the development process
  • Put into practice a process of experimentation to eliminate uncertainty
  • Conducted experimentation that relied on either engineering, biological, physical, or computer science
  • Employed all or a portion of your workers within the United States

If your business qualifies, the next step is to put together your qualified research expenditures (QRE). Your QRE will be very specific items. Below, you can see what counts as QRE for your R&D tax credit application:

  • The salaries of your U.S.-based employees working in R&D
  • 65% of the feeds accrued when hiring 3rd party U.S.-based contractors to conduct R&D
  • Disposable supplies purchased for your company’s R&D program

With these numbers in hand, you will be able to get started on your R&D credit application. It’s best practice to work with a tax credit professional even if you have an individual on staff who works on your taxes. R&D tax credit applications required precision, and a tax credit expert can help you maximize your credit.

How much is the Federal R&D Credit?

Alabama companies working to create new products can receive a credit that total 7-10% of their total QRE.  If you know how much your QRE is, you can use a free R&D tax credit calculator to get an estimate of your credit total. The federal R&D tax credit is an incredible resource as it can be used to directly offset either your payroll or business income tax. How the credit can be utilized is determined by your company’s age and the amount of revenue it is bringing in. You can even choose to carry your credit forward by 20 years if you don’t want to use it right away. Bear in mind that unlike some state R&D tax credits, you can’t sell your R&D for profit.

What You Need to Know About Alabama R&D Tax Credits

You can’t claim a state R&D tax credit if you own a business in Alabama, but you could be eligible for the federal R&D tax credit program. If your business meets the program requirements, you could receive a credit that can help you reduce your tax burden. Contact us at Bowers R&D today and find out if you qualify.

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