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?