The Research and Development (R&D) Tax Credit was introduced as a two-year tax credit in 1981, and was later made permanent in 2015, as a way to benefit private organizations that advance the economy through research and development initiatives. It is designed to reward taxpayers, of any size and within any industry, that create new or update existing products, processes, techniques, formulas or software. The credit provides a tax break for some of the taxpayer’s Qualified Research Expenses (QRE), including wages, supplies, contract research expenses and payments made to qualified research organizations.
The R&D Tax Credit is an incentive for organizations to pioneer the innovation that allows our society to flourish. However, businesses unfortunately often overlook the credit because they mistakenly assume they do not qualify, and if businesses do claim it, they often claim less tax benefit than they are entitled to.
What Types of Companies Qualify for the R&D Tax Credit?
Almost any company that resolves challenges in an innovative way is potentially eligible for the R&D Tax Credit. Some of the industries that are exceptionally well-positioned to be eligible for the R&D Tax Credit include, but are not limited to:
- Architecture & Engineering
- Craft Beverage
- Medical Practices
- Property & Casualty Insurance
How Can the R&D Tax Credit Benefit My Organization?
The R&D Credit is designed to help organizations mitigate some of the financial risk and time investment associated with innovation. The funds received from the credit could benefit your organization in any of the following ways:
- Provide cash refunds of previously paid federal and state taxes.
- Reduce your current federal and applicable state tax expense.
- Free up capital for investment in business, product development and debt reduction.
- Increase the value of your business to potential buyers or investors.
- Provide Alternative Minimum Tax (AMT) relief.
- Deliver a payroll tax expense refund/reduction.
What Activities Qualify for the R&D Tax Credit?
The innovative product, process, technique, formula or software does not need to be new to the world or even new to the industry. It simply needs to be new to the business. Additionally, the business must also be able to demonstrate activities to satisfy a four-part test from the IRS:
- Elimination of uncertainty: The company has attempted to eliminate uncertainty about the development or improvement of a product or process.
- Process of experimentation: The company has evaluated alternatives for achieving the desired result, and can demonstrate having done so through modeling, simulation, systematic trial and error or other methods.
- Technological in nature: The process of experimentation relies on one or more hard sciences, such as engineering, physics, chemistry, biology or computer science.
- Qualified purpose: The research creates a new or improved product or process that results in increased performance, function, reliability or quality.
Investing in resources for improving existing or developing new products, manufacturing or service processes are the majority of activities that businesses take part in to be eligible for the credit. Companies investing in software and their related technologies, such as artificial intelligence (AI), financial modeling, fintech applications and security protocols may also be eligible. Making improvements to existing systems also qualifies for the IRS test, including efforts to develop manufacturing efficiency, reduce waste and implement more environmentally-friendly techniques.
How Do I Claim the R&D Credit?
The R&D Credit can be claimed for both the current and prior tax years so it’s important to ensure that your documentation is up-to-date. Throughout your research and development process, your business should be keeping continual records to establish the amount of qualified expenses paid for each activity. This could include:
- Payroll records
- General ledger expense details
- Project notes and lists
Eligible small businesses (those defined as having an average of $50 million or less in gross receipts over the past three years) may claim the R&D Credit against their Alternative Minimum Tax (AMT) liability for tax years starting after December 31, 2015.
Why Choose BSSF for R&D Credit Services?
The team at BSSF have the practical knowledge and experience to help your business benefit from the R&D Credit, while providing you with the latest tax changes and key updates.
Contact the team at BSSF today to get started!