- What is the R&D tax credit?
The United States government promotes and incentivizes business innovation by allowing tax credits for research-related expenditure. Known as Research and Development (R&D) tax credit, it is a highly underrated tax incentive that can be claimed by a business of any size and is not restricted to large corporations or research labs.
- How is the R&D tax credit computed? How much tax savings can I potentially get?
There are two general methods: the Regular Credit (RC) method and the Alternative Simplified Credit (ASC) method. Both methodologies are included in the IRS Form 6765 Credit for Increasing Research Activities. The taxpayer is permitted to elect either of the two methods when preparing to file the return. However, since each method has distinct advantages and disadvantages, it is important to understand both – mainly because the elected method cannot be changed on an amended return.
The R&D tax credit can range between 6%-14% of the company’s current year qualified research expenses.
- Which industries are eligible for the R&D tax credit?
If your company has invested in designing or developing a process, service, software, or product in science or technology, you could be eligible for the R&D tax credit. Please refer to this infographic to determine your company’s eligibility.
- What research activities qualify for the R&D tax credit?
Companies that are most likely to qualify will have research activities focused on:
- Developing a new or enhancing product/process/prototype/software
- Eliminating technical uncertainty
- Principles of hard science/engineering
- Research for a qualified purpose that involves experiments
Research activities, irrespective of their success, must engage a scientific process to improve the business either through processes, products, or software.
- What are the benefits of the R&D tax credit?
Being committed to innovation is critical if you want to gain a solid edge over your competitors. Other benefits include:
- Reduction in federal & state income tax liability
- Immediate cash flow
- Tax credit carried forward up to 20 years.
- Unclaimed credit for open tax years, generally the last 3–4 years.
- Why do most businesses neglect to file the R&D tax credit?
This is normally due to the lack of sufficient information, or they believe they do not have the right type of business. The PATH Act of 2015 opened up the R&D tax credit’s rewards to many SMEs and Startups.
- What documentation do I need to submit in order to qualify for the tax incentive with the IRS?
A proper mechanism should be put in place to track and document designs, processes, objectives, action steps, discussion points, failures, and successes in real-time.The following tips will help you improve your the R&D tax credit documentation:
- Retain records of lab reports, project lists, project notes, logs, PO’s internal emails, patent claim, and experiment descriptions
- Use an online timesheet to track your project’s timeline – this will document the R&D related wages.
- Keep contracts, invoices, and 1099 forms on-file to demonstrate your IP rights, especially if you subcontract the R&D work
Our earlier blog takes a more in-depth look at the documentation.
- What expenses qualify for the R&D tax credit?Qualified research expenses generally include:
- Employee and Supervisor wages (only for the % of time spent on the R&D activities)
- Contractor costs if you hired a third-party contractor to perform research
- Supply and material costs incurred in the R&D activities
- Computer leasing for Cloud services used to conduct experiments/research
- What if I missed claiming the R&D tax credit in the past?Can I claim it now? For how many years can I go back and claim?Normally, you can get unclaimed credit for open tax years, specifically the last 3-4 years. If your credit exceeds the amount you paid in income tax(es), you can carry-forward unused credit for up to 20 years.
- Can a Startup without a taxable Income take advantage of the R&D Tax Credit?Yes, you can claim the R&D Tax credit as long as you have incurred qualified research expenses in the taxable year. Any unused credit can be carried forward up to 20 years or used earlier if it becomes profitable and offsets the unused credits against the tax liabilities in those years.Startups and small businesses can qualify for up to $1.25 million (or $250,000 each year for up to five years) of the federal R&D Tax credit to offset the FICA portion of their annual payroll taxes.To qualify, Startups must:
- have less than $5 million of revenue in the year that the credit is claimed and,
- not have had any revenue before the last five years.
To learn more, please contact Astute. We have been providing the R&D tax credit services to many businesses year-after-year, saving them millions of dollars.