by Michael Cieri, CPA
Tax credits are very valuable. A tax deduction lowers your taxable income. A tax credit, on the other hand, is like a coupon that lowers your tax. Some credits are even refundable: if the credit is more than your tax, you get a check from the government! One of the most valuable tax credits available to small business is the credit for increasing research activities, affectionately known as the R&D credit. There are many misconceptions regarding the R&D credit, such as only big businesses benefit or that to qualify for it a company must employ scientists trying to discover cures for the world’s biggest problems. That could not be further from the truth. The R&D credit is actually fairly broad. If you have an engineer on staff your company likely is engaged in an activity that would qualify for the R&D credit!
Any company that designs, develops or improves products, processes, techniques, formulas or software may be eligible. Tax Regulations from 2015 even include certain types of internal use software development as eligible for the R&D credit.
An eligible R&D process meets the following criteria:
- Elimination of uncertainty – Your company has attempted to eliminate the uncertainty about the development or improvement of a product or service.
- Process of experimentation – Alternatives were evaluated in achieving the desired result.
- Technological in nature – The process must rely on technology.
- Qualified purpose – The purpose must be to create a new or improve an existing product or process resulting in higher performance or better quality.
After determining that your company is engaging in the R&D process, the next step is to identify the relevant expenses.
There are three types of expenses that qualify for the R&D credit.
- Wages – For those working directly on, supervising or supporting the R&D process.
- Supplies – Used during the R&D process.
- Contractors – 65% of the cost of outside contractors brought in to support the R&D process.
There are strict recordkeeping guidelines for expenses that associated with the R&D process when claiming the R&D credit. Make sure to follow those guidelines and that your company maintains the proper support for claiming the credit.
Many US states and foreign countries offer their own R&D tax credits or other incentives for corporate discovery.
John Schachter + Associates Inc. helps clients spot opportunities to claim this valuable credit and helps them navigate the sometimes its complex rules. Please ask us if we can help your company grow this way!