What activities qualify for R&D tax credit?
Qualifying R&D expenses and/or activities are those which pass this four-part test:
- Technical uncertainty. The activity is performed to eliminate technical uncertainty about the development or improvement of a product or process, which includes computer software, techniques, formulas, and inventions.
- Process of experimentation. The activities include some process of experimentation undertaken to eliminate or resolve a technical uncertainty. This process involves an evaluation of alternative solutions or approaches and is performed through modeling, simulation, systematic trial and error, or other methods.
- Technological in nature. The process of experimentation relies on the hard sciences, such as engineering, physics, chemistry, biology, or computer science.
- Qualified purpose. The purpose of the activity must be to create a new or improved product or process, including computer software, which results in increased performance, function, reliability, or quality.
Does my business qualify for the R&D credit?
If your business has less than $5 million in annual revenue, and it has been less than five (5) years since your first gross receipts/sales, you can frequently reduce your Social Security Payroll tax liability under the PATH Act R&D credit. If you do not qualify under the PATH Act R&D Credit, you can take regular R&D Credit against income taxes (rather than against payroll taxes).
Why is having a formal R&D tax credit study done a good idea?
We recommend anyone who plans to claim the R&D credit to get a formal study done by a qualified expert. An R&D study determines the total amount of the R&D tax credit and collects the necessary documentation to support the claim.
As a part of filing the R&D tax credit, you are required to submit the relevant tax forms to the IRS. You must be able to support your stance on the technical and financial position you are claiming and be prepared to support it in case the IRS audits your claim. If the IRS audits the claim and you cannot support the claim you filed, you will need to refund the money to the IRS and run the risk of potentially paying penalties and interest. R&D tax credits are heavily scrutinized by the IRS. Once you have been audited and errors are identified, the IRS can audit your claims for up to 7 years prior.
How much will my R&D tax credit be?
Unlimited, if applying the R&D credit against income taxes. These credits can range between 5% and 15% of qualifying R&D costs. If taking the PATH Act R&D credit, a company is eligible to receive up to $250k that can be taken against payroll taxes and the remainder can be applied against income taxes.
Which states offer R&D tax credits?
Today, about forty states offer their own version of R&D tax credits, many of which are modeled after the federal R&D credit program. Each state is different, so it is important to check your state government’s website page or reach out to us and we can talk to you about this in more detail.
Can I claim the R&D tax credit retroactively?
Yes, we can assist you with filing an amended tax return to claim the R&D credit for previously filed tax returns for the past three year, but you are not allowed to take the PATH Act R&D credit on an amended tax return.
When does the R&D tax credit expire?
With the enactment of the Protecting Americans from Tax Hikes (PATH) Act of 2015, federal R&D tax credits became permanent. In the past, Congress would extend the R&D credit for another year or two.
A business can take the credit for all open tax years—generally the last three or four years plus the current year. R&D tax credits may carry forward 20 years.
What Does Your R&D Credit Service Include?
We help businesses with every step of claiming R&D Tax Credits. We will:
- Identify and calculate qualifying R&D expenses
- Prepare necessary forms with the IRS to obtain approval of credit.
- Prepare all required technical and financial supporting documentation, including evidence of research time, R&D payroll expenses, etc. This is a necessity in case of an IRS audit.
- Coordinate with your tax preparer and payroll provider to ensure your records and taxes are accurate
- Ensure the credit is applied correctly and accurately against your payroll liabilities
Can I Only Utilize Your R&D Tax Credit Service?
Absolutely. We’ll calculate the R&D tax credits and provide the necessary documentation for your tax preparer to file. We are happy to work with you and help you out in any way that we can. We are also always happy to discuss our CFO services with you to see if they could benefit your business.