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Getting the Most Out of the Research and Development Tax Credit

Feb 20, 17 Getting the Most Out of the Research and Development Tax Credit

The Research and Development tax credits are now permanent. The US government has introduced some new changes that extend the purview of the tax credits offered to business for innovation activities.

What’s New?

Earlier only companies involved in revolutionary developments in their industry were considered worthy of tax credits. This has changed and as per the new laws even the evolutionary activities such as investing time and efforts in the development of new ideas that are valuable though not groundbreaking are considered as Qualifying Research Activities.

The R&D tax credits cover a wide range of activities and the best part is you don’t need to be successful in qualifying. The activities just need to meet the following four criteria mentioned below.

Passing the Four-Part Test

  • Permitted Purpose – The research should be intended to develop or improve a product or processes. It is necessary the research activity is focused on improving functionality, quality, reliability or performance of the product. If your research is directed for cost reduction, it is considered as qualifying research. However, activities that are performed for aesthetic purposes do not qualify for credits.
  • Process of Experimentation – You need to demonstrate through modeling, simulation, or any other method that you have evaluated alternatives to get the desired results.
  • Technical Uncertainty – It is necessary that your company has taken necessary steps on eliminating any uncertainty regarding the product development or process improvement. Also, you need to show you are aware of the procedure and methodologies to reach the goal.
  • Technological in Nature – The research activities should be based on any science such as engineering, biology, physics, chemistry or computer sciences. Activities based on social, economic or psychological sciences are not eligible for tax credits.

According to Alliantgroup estimates, the US Federal government offers more than $7.5 billion in R&D tax credits. There is plenty of pie available and almost any company performing qualifying research activities can grab their piece by learning about the tips that can help reap maximum rewards of R&D credits.

How to Reap Your R&D Tax Credits?

Maintain Records

You need to keep all records updated to verify the company’s research costs and the work it does. Track everything right from the beginning to avoid any issues later on. Your R&D credit is more likely to get audited by the IRS (Internal Revenue Service) and only proper documentation of the records can help you successfully claim the Research and Development tax credit. The best way to maintain records is to print everything or the IRS might think no research happened.

Keep the Research Activities Local

The Federal R&D tax credits are only available for domestic research. If your company has spent on R&D in a foreign country, the research activities are not eligible for tax credits. Employing overseas contractors for research is not considered creditworthy. If you have employed contractors for research, they must be working in any state of the US.

How Much R&D Tax Credit You Can Claim?

According to the new regulations, startups that are less than five years old and have annual gross receipts less than $5 million can claim up to $250,000 in credits against payroll taxes. Companies with less than $50 million in annual gross receipts and having three taxable years can now claim R&D credit against the Alternative Minimum Tax. If you calculate it as dollar for dollar credit, you can claim up to 6.5% of employee wages. You can also claim up to 65% of the amount paid to contractors under the R&D tax credit scheme.

Applying for R&D Tax Credits

Claiming R&D tax credits is simple. You just need to show the qualifying research work and the related expenditure. Given your organization is a typical firm that follows proper project documentation practices and time tracking, it would be easy to backup your tax credits ( claims.

The Research and Development Credit is a great way to bring back the money that you have spent on research and improving existing products. There is a misconception that R&D tax credits benefit big firms only which is not true. Small and medium-sized businesses are less informed that prevents them from getting most out of the R&D tax credits.

So, have you applied for R&D tax credits this year?

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R&D Tax Credits Can be Big Boon for Startups

Dec 22, 16 R&D Tax Credits Can be Big Boon for Startups

The Texas R&D tax credits are in line with Federal R&D credits introduced by the US Government. In fact, the Texas State government has made the deal sweeter by increasing the purview of the research and development credit.

We need not tell you that how important the additional cash is for a startup to keep the business running when profits is a distant dream that will take some time to realize. Until December 2015, the R&D tax credits were temporary but in December 2015, the R&D tax credits were made permanent under the PATH Act (The Protecting Americans from Tax Hikes Act of 2015). This means organizations can plan their long-term R&D projects with greater certainty.

R&D Tax Credit for Startups

• 1-5 years – 3% for first five taxable years after December 31, 1993, in which the company has QRE’s

• 6th Year – 1/6th of aggregate of qualified research expenses of 4th and 5th year divided by Years 4 and 5 aggregate gross receipts

• 7th year- 1/3 of aggregate of qualified research expenses of 5th and 6th year divided by Years 5 and 6 aggregate gross receipts

• 8th year – 1/2 of aggregate of qualified research expenses of 5th, 6th, 7th year divided by Years 5, 6 and 7th aggregate gross receipts

• 9th year – 2/3 of aggregate of qualified research expenses of 5th, 6th, 7th, and 8th year divided by Years 5, 6, 7, and 8 aggregate gross receipts

• 10th year – 5/6 of aggregate of qualified research expenses of 5th, 6th, 7th, 8th, and 9th year divided by Years 5, 6,7, 8, and 9 aggregate gross receipts

Texas Provides Credits and Exemptions That Create a Thriving Startup-Ecosystem

Texas R&D Credit extends the purview of R&D tax excemption proposed by the Federal government. According to new guidelines, the Texas government provides sales/use tax exemption to companies that applies to use, storage and sale of depreciable tangible property directly that was used in qualified research. If the property is rented, sold, leased, or used by a person who is involved in “qualified research” then he can claim sales/use tax exemption

To get the exemption the taxpayer is required to register with Comptroller’s office prior claiming the exemption on qualifying purchases.

Texas R&D Tax Credits Can Be Used Against Franchise Tax

The amount of credit given against the Franchise Tax is 5% of the difference between QRE’s(Qualified Research Expense) incurred in Texas during that period and 50% of the average amount of QRE’s incurred in Texas during three tax periods immediately preceding the period on which the report is based. The good thing is R&D tax credit can be carried forward for 20 consecutive reports.

R&D Tax Credits Are Applicable to AMT (Alternative Minimum Tax)

The revamping of R&D tax excemption rules has benefitted the startups immensely. Earlier startups generating less revenue were required to AMT and the R&D credits were not applicable to AMT. With modifications to the R&D tax credit laws, eligible businesses including startups with $50 million and less in gross receipts can apply for R&D tax credit against the AMT liability.

According to new regulations, startups having gross receipts less than $5 million can apply for R&D incentives up to $25,000 against their payroll taxes.

How Can Startups Get the Payroll Tax Benefit?

Consider Company A, a startup employing 25 people with an annual average salary of $80,000

· Total Payroll costs for a year – $2,000,000

· the OASDI(Official Name for Social Security) Employer Tax Liability (full year) for 25 employees will be – $2,000,000 X 6.2% = $124,000

· 2016 Research Credit = $25,000

· Estimated OASDI employer tax–2017 Q2 is $31,000

· Credit applied is $31,000

· OASDI employer tax amount due- Q2 is $0

· Carry forward to 2017 Q3 is ($250,000 – $31,000) = $219,000

According to the Small Business Trend ranking, Austin is the best city in Texas to launch a startup. There is no denying that startups in Texas have low tax burdens and a great startup- network. All this creates a business atmosphere that is encouraging and stimulating for startups. Texas has its own version of R&D tax credits that puts more money back in startups that help startups in their initial struggling years.

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Myths That Keep Businesses from Claiming the R&D Tax Credit

Oct 04, 16 Myths That Keep Businesses from Claiming the R&D Tax Credit

The HMRC says that only 3% of the actual projects claim the R&D tax credit from the government. This means that approximately only one million pounds is being claimed under this relief scheme –it was actually supposed to be more than twenty-five million pounds.

The main reason for not able to claim is the myths that are surrounding the R&D tax credits facility. So, here are some of the myths that surround the same and the facts that will help your company make the R&D tax credit from the government.


Before reading the myths, first let us see what R&D Tax Credits is all about. It is a scheme that is started by the government to help companies that are working in the R&D sector. Since it is very important to have R&D activities that help the overall economic development of the country, the government introduced this scheme.

Here are the Myths:

1.  I am not eligible to claim the R&D taxes: According to the HMRC, any company that is a regular tax payer is eligible to apply for the R&D tax credit from the government. If you are a regular tax payer for the last couple of years, you stand a chance to avail this facility.

2.  I do not work in technological sectors: There is a myth that you can claim the R&D tax credit only if you are working in the technological sector. But the HMRC claims that most of the projects cannot be classified as purely technological in nature. If you project is working on process or services which helps the general public and is beneficial to the larger section of society, you can avail this facility. The projects that come under this section include software development, designing of new products and engineering new products with various new ingredients. Even if your research is working in improving the manufacturing process you can still go ahead and claim the tax benefit from the government. Enhancing existing technology in any way is considered as advancement and hence claimable under the scheme. However, if you have taken assistance from the funding agency for your research activities, then the amount of claim that you can avail depends on the amount of financial aid that you have already received for this activity.

3.  I am a SME: Many small companies differ from taking the advantage of Research and Development Tax Relief thinking that it is not applicable to SME (Small and Medium Enterprises). It is a general myth that benefit is applicable only for large companies which is not so as R&D tax loans are applicable to SME, start-ups and large companies. Starting from April 2015, this scheme’s claim enhancement (the enhanced deduction) has been increased to 230% of the qualifying R&D expenditure incurred. This is specifically designed for SMEs alone.

4.  My research is making losses: Another most common myth about claiming R&D tax credit is a loss making SME cannot claim for the relief. The fact is that not only profitable companies, but also companies who are making a loss can claim the monetary assistance. The companies that are making profit can also claim the same in the form of reduction of CT (Corporate Taxes).

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How to Go About Financing Your R&D Tax Incentive?

Oct 03, 16 How to Go About Financing Your R&D Tax Incentive?

Companies in Australia which are working on R&D activities find it difficult to run their business mainly because of constraints in cash flows. To overcome such constraints, the government of Australia has permitted a scheme called the R&D tax funding/financing. This means that you can contact agencies/companies that are ready to fund your capital expenditure.  With this facility you can think about financially expanding your company without having to concentrate on the cash flows of your business. Read on to find out all you need to know about your R&D tax incentive finance.

how-to-go-about-financing-your-rd-tax-incentiveBefore that, you should be familiar with a few other related terms.

What is R&D Tax Incentive?

As the name indicates, it is a credit that you can avail from the government, mainly if you are working on R&D activities. This is to encourage companies which are working in the research areas. This scheme was introduced because the companies working in the research sectors undergo a huge risk, not only in terms of capital expenditure but also in terms of delivering the quality results to the end customers.

This incentive can be availed if:

o  Your project is purely technological or scientific in nature.

o  Your project/company is registered with the AusIndustry (which runs on behalf of Innovation Australia).

o  You are a regular corporate tax payer to the government.

How and when to you claim for the R&D Tax Credit?

You need to claim for the R&D tax credit ( along with the corporate taxes that you pay to the government annually. During this time of tax filing you need to mention the following, so that you are eligible for the R&D tax credit:

o  Technical details regarding the research activities – the current problem that your research is addressing and the time line at which your research activities could yield positive results.

o  The persons involved in the project and the tasks assigned to each.

o  The total revenue and cash expenditure incurred by the R & D activities.

o  The day to day cash transactions.

If your company finds it difficult to claim the R & D tax funding or the R & D tax credit from the government, there are agencies and companies who can assist you with the same. The areas in which you can get assistance are:

  Identification of the R & D eligible activities

  Preparation of the technical write-up

  Assembling of the total tax expenditure and the filing the R&D tax application

  Providing the claim summary letter

  Related advice regarding the same

What is R & D tax financing?

There are some financial institutions which are ready to fund for your research activities. This type of funding happens even before you avail the R&D tax credit from the government. They work with a set of terms and conditions and lend you money with some rate of interest. This money can be repaid to the financial institutions after you avail the R&D credit from the government.

What is the use of R&D Tax Financing?

With the help of such funding, you can:

o  Run your business without having to think about the huge expenses and cash flows which you encounter.

o  You can have more resources work on the specified research activities.

o  Provide clarity with respect to the time line and delivery of your research activities.

o  Do not have to think about capital fund raising from any other sectors.

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R&D Tax Incentive Can Help Boost Innovation

Sep 01, 16 R&D Tax Incentive Can Help Boost Innovation

Experts suggest that, the more time you spend in researching a subject, the more information you tend to gain. This suggests that research and innovation go hand in hand. This helps in the growth of the country’s economy which in turn helps in wealth creation. Hence, the government of Australia has schemes that helps and boosts the innovation amongst companies. One such scheme is the R&D tax incentive. This is an initiative started by the Australian government to help companies that are working on the research and developmental activities.

R&D Tax Incentive Can Help Boost InnovationThis is started by the AusIndustry. This is an independent statutory body established under the IR&D act. This organization overlooks all the administrative tasks related to projects/businesses that work on Innovation and research. It also takes assistance from the Digital Economy update – which gives a complete picture of the digital state of Australia.

With the help of this scheme, all companies working on research activities are eligible to claim a credit from the government. This credit could be in two possible ways:

1.  A credit in the form of cash payments – which is obtained from the government.

2.  The tax offset – a reduction in the amount of annual taxes payable to the government – essentially, meaning that you can pay less in terms of your CTs.

With the help of the credit that you get from the government, it is helpful for a business in the following ways:

o  You can conduct your research activities without having to think much on capital expenditure – because a major portion of your expenditure can be claimed under the R&D tax credit incentive.

o  Be open to ideas and also be adaptive to change, because a large number of costs  like your employee costs, contractor costs, sub-contractor costs and even the software cost to some extent can be claimed under this initiative.

o  You do not have to think about profit and loss of your business – this scheme is applicable even if your research does not show any profit at the end of the research cycle.

The other advantage that you get from this facility is termed as the R&D tax credit finance. There is a huge amount of risk that your company is bearing because of the research activities – the end results are not determinable. Also the capital expenditure is high. Hence to facilitate your growth and sustenance, the government has approved of R&D tax credit finance. Some companies will be ready to fund and finance your research activities. However, you need to be aware that the R&D tax funding that you receive from this scheme can be used only for research activities and not for any other purposes of running your business. There will be certain terms and conditions that are associated with this type of finance. Just be aware of the general terms and conditions and also the rate of interest with which you need to repay your parent company. You need to repay your parent company only after you avail the R & D tax credit amount from the government.

The process of claiming the R&D tax credits is also very simple. This needs to be done along with your CT (Corporate Taxes). You need to mention the details of your research activities by providing a technical write-up. A technical write up should contain all the details of your research activities, people involved, the target date of the result of your activities and the day to day cash transactions and cash flows of your research activities.

Companies are satisfied and more companies can be encouraged since elaborate support is provided from the government in the form of R&D tax credit incentive.

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How and When to Claim R&D Tax Credits?

Aug 23, 16 How and When to Claim R&D Tax Credits?

If your company is working on projects that are related to research and development, then you stand a chance to avail these credits from the government – in terms of paying your corporate taxes. The credit which is given to companies working on R & D activities is called the R & D tax credits.

This is an initiative started by the government of UK to encourage such activities which are essential for the development and sustenance of a strong economy. It is important to know if your company qualifies for this initiative. Both SME (Small and Medium Enterprise) and large companies are eligible to claim the credit. The main criterion is that your project should be in the field of science or technology. It could be research in the field of scalability, performance, integration, or product development. The solution to the problem is that your research is being done on should not be known to the general public. However, it should be innovative and creative in nature too. This initiative was started to increase innovation and wealth creation in the economy.

How to claim the R & D tax credits?

There are two parts involved in claiming the R & D tax credits.

•  Technical Aspect – contains the details of every technical aspect in research.

•  Financial Aspect –takes care of the actual cash flows between your company and the government.

a.  Technical Aspect: To claim for the R and D tax credits, you need to remember that you should provide a technical narrative to the HMRC. A technical narrative is a document that will provide all the details about your project:

o  The problem statement that is persistent in the technological and scientific field.

o  The solution which your research activity is aiming to provide.

o  The cost incurred for the research activities.

o  The day to day transactions of your activities and the material costs incurred for the same.

o  The persons/employees working on this activity.

b.  Financial Aspect: The financial aspect includes the administrative procedures involved in filing the returns. The R & D tax credits claim needs to be done along with your CT (corporate taxes) that you pay to the government. It is important to know that the R & D tax credits ( incentive needs to be filed within two years of the end of the accounting period to which it relates. This means that your company can file claims up to the first anniversary of the filing deadline for the corporate tax return. You need to submit the R & D tax claim in the CT600 tax return form itself. The HMRC details that it is not necessary to file any other form other than your CT600 to file for the R&D tax relief.

How and When to Claim R&D Tax Credits

Good to know facts!

There could be huge expenses that are undertaken when you are running a project that is research and developmental in nature. The risk involved is also very high. But not all costs that are incurred by your business can be covered and claimed under this initiative.

The rates are different for SMEs and large companies. Even companies that do not show any desirable output at the end of the research activity can still claim for the relief from the government. It is also important to remember that if your project is showing losses or it is non-profitable, you can still continue to go ahead and file for the credit incentive from the government. This way, you can save your company from extended losses and use the credit amount to run your business successfully.

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R&D Tax Funding Strategy for Your Business

Aug 02, 16 R&D Tax Funding Strategy for Your Business

When you are running a business, there are a number of things that you would consider, since money is of utmost importance. One such thing is to save the huge amount of taxes that you pay to the government. This is very true if your company is working on R & D activities. This is because, the cost incurred in running such business is very high – but the results are not guaranteed. Meaning – it would take time for your research to yield the desired results.

But now, relax, you can use the R&D tax funding strategy for your business and save the taxes that you pay to the government.

R&D Tax Funding Strategy for Your BusinessWhat is R & D tax funding?

As the name indicates, it is the fund that is given to projects that are working extensively only on research activities. If your project activities are research in nature, then you would be working on experiments and that would lead to observation, analysis and then an outcome. In such cases, the risk involved is very high. But at the same time, such research and developmental activities are essential for the growth of a strong economy. Hence the ATO, in joint venture with the AusIndustry (On behalf of Innovation Australia) has come up with the scheme called the R & D tax funding.

What is R & D tax funding strategy for your business?

Since your company and the project may have a lot of uncertainties and risks, there are a large number of companies that are ready to provide credit for these research activities. This is called the “tax credit finance”. While you are considering companies to finance for your research activities, it is important that you check the terms and conditions associated with the credit facility that is provided to your company.  It is also essential for you to check the charges levied, interest rate and the general terms that would meet the specific needs of the research activities that your company is undertaking.

Using this type of tax funding strategy for your business is very essential. When the Research and development activities receive such financial aid- in the form of R & D Tax credit ( finance, it helps the company to:

o  Involve greater in research activities by not worrying about the capital raising options.

o  Invest more resource and time into research activities.

o  Develop products that are not commercial in nature by making use of the advanced technology.

o  These research activities would help the larger masses and hence the development of the country’s economy.

Eligibility Criteria:

Since there are companies that will be financing your research and development activities, it is important for you to understand the eligibility criteria for availing this finance.

•  First and foremost, your research and development activities should be registered with the AusIndustry (which runs on behalf of Innovation Australia). Registering your project activities is a legal requirement for availing the R & D Tax incentive and also the related finance.

•  Secondly, your company/business should be a regular payee of the CT (corporate taxes) with the government.

•  Thirdly, as the name suggests, the projects that you are undertaking should be purely research and development oriented. Meaning – it should be related to the development of science and technology and also helping the larger masses of the population.

Generally, companies looking for R&D Tax funding, finances only technology related research activities. However, if your company is developing any new machines, prototypes, software’s for the welfare of the larger masses and not commercial in nature, your company can still be eligible for this tax credit which is provided by the ATO – and hence could think of having a R&D Tax Funding Strategy.

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