R&D tax credit - how does this work?

If a company typically spends let’s say $10 million a year to pay a group of its own employees to conduct R&D, perhaps some third party engineers as well, and maybe for the office space and equipment for these guys, I assume that $10 million is tax deductible like any other business expense? Or is it actually typically NOT tax deductible unless there is a law providing for R&D tax credits? Because I sometimes hear about how America just perpetually renews its R&D tax credit but we should make it a permanent part of the law. And I just wonder, if the R&D tax credit law were to expire, does that mean that $10 million I mentioned before cannot be deducted against taxable income? That doesn’t make any sense to me. Thanks!

are you actually asking about capitalizing expenses as assets?


I’m under the assumption you can basically never capitalize R&D expenses, so not really asking a question there. I’m asking what an R&D tax credit means. If a company spends some money so their employees conduct “R&D” (however that’s defined), isn’t that a regular business expense and therefore tax deductible? Why does there need to be a separate R&D tax credit?

The R&D credit is available as a credit not a deduction. Therefore $1 of expenditures reduces the tax liability by $1. If you do not meet the credit rules, then it is deductible. This would produce a .35 benefit per $1 of R&D expenditures.

Gotcha, thanks. I assume the tax credit and regular expense deductions are mutually exclusive, or else you’d basically be making money from R&D expenditures?