A credit applies against your tax liability. So if you have a tax credit for $100, your tax liability is reduced by $100. Credits generally do carry over to future years to the extent unusable in the current year.
Whether a credit is preferable to a deduction depends on the taxpayer's tax situation, including whether they would be able to make use of carried-over credits in future years.
Edit: in a previous comment I said R&D credits aren't available if you don't have positive income. That's not strictly true. R&D credits only apply against actual tax liabilities, but if you don't have any taxable income the unused credits would carry over into a future year for potential use.
It's just like if you hire a builder to make you a rental property. You can't deduct 100% of the costs of that house in the year it's built.
No idea why people think R&D needs to be cutting edge tech research...
At the level of a national or regional restaurant chain, it would definitely qualify. The development of menu items for a large chain involves a significant amount of research and scientific experimentation to nail down ingredients, storage and cooking processes, etc., that meet certain financial metrics, nutritional requirements, regulatory requirements, etc.
For a one-location restaurant, or small chain, it would be a lot more difficult to qualify for R&D credits. You'd have to show that menu items were developed to meet specific predefined targets in ways that would not have been obvious without the research/experimentation activity. Flavor is an acceptable target if the flavor can be clearly defined.
We're basically creating a new industry niche, so it is clear R&D. It's not like we're just churning out new shopping carts sites for the customer of the week.
We're just wrapping up our Series A, which included a major investment from CAT though, so we're in a lot better shape than we were a year ago when we started the initiative to take advantage of the tax credit.
http://ac.els-cdn.com/S235197891500013X/1-s2.0-S235197891500...
I was more taking a shot at the companies who do a redesign/facelift of their website/customer portal, or a bank struggling to integrate an off the shelf trading tool into their systems.
That's not true at all. In the US, at least. As a tax lawyer, I've had to have this conversation quite a few times with accountants who misread the law and don't think it applies to their clients.
The US R&D credit has 4 basic requirements, and "cutting edge" is not one of them, nor has it ever been.. Generally (broadly paraphrased), it is sufficient that the R&D result in new (or improved) functionality, etc. of a business component (specific to the taxpayer), in a systemic process of a scientific, engineering, or computer-science nature.
For example, a game developer developing a new game engine would qualify for the R&D credit; as would a retail company developing an improved inventory system. (The latter is in fact one of the examples that IRS employees give at tax seminars.)
The real issue with the R&D credit isn't claiming the credit; it's supporting the amount claimed with proper and sufficient documentation. It's the documentation part that gets most taxpayers, since the R&D credit is one of the areas that the IRS still devotes resources to auditing.
Further edit: by the way, Gusto's article is about the new small business R&D credit from the Protecting Americans from Tax Hikes Act (PATH) which went into effect for the 2016 tax year. The original credit is limited to taxable income, so you couldn't use it until you had profits or if you were subject to AMT. The new credit applies against federal payroll and AMT.