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Is That New?

To prove you deserve an R&D credit, when the IRS says "Jump," you'll say "Which hoop?"

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This story appears in the January 2003 issue of Entrepreneur. Subscribe »

The federal tax laws require business owners claiming the R&D credit to discover information that is "technological in nature," a so-called discovery test. The definition of the test is likely to be modified, but for now, many companies find it undefined and confusing.

The credit is designed to encourage businesses to increase their spending in R&D. While the credit is not permanent, Congress has continually extended it. The Tax Extension and Relief Act extended the credit through mid-2004. Unlike a deduction, which reduces taxable income, a credit is a dollar-for-dollar reduction in your tax bill.

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