James T. Crane, CPA, has noticed that companies have shown a growing interest in exploring tax credits for the betterment of their businesses. For example, companies in a wide variety of industries have made the decision to pursue the Research and Development (R&D) Tax Credit to perform duties such as invest in new product lines, scale their business operations, and facilitate the hiring of new staff.
Even though the R&D tax credit provides opportunities to reduce income tax liabilities, potentially saving companies hundreds of thousands of dollars, many businesses have misconceptions regarding the process. This means that these businesses may miss out on the opportunity to further benefit from the R&D tax credit because they are not aware of their eligibility nor its applicability to their company’s current operations.
James T. Crane realizes that the best way to ensure that businesses put themselves in the position to pursue the tax credit and expand to contribute to research and development is to provide clarity on the process. Here, he discusses the R&D credit and how businesses can determine if they are eligible.
What is the R&D Tax Credit?
The R&D Tax Credit was first enacted in 1981 and has remained one of the most valuable tax credits available for companies. In 2015, the R&D tax credit was made permanent through the Protecting Americans from Tax Hikes (PATH) Act. Modifications were included for small businesses’ benefits and the credit was also made available to startups through the PATH Act.
Companies engaged in qualified research and development activities are provided benefit in the form of a non-refundable tax credit to offset federal income tax liability and payroll tax liability. This includes taxpaying entities that design, develop, or improve processes, products, software, or formulas. Over 30 states in the US provide this tax credit, and over $18 billion in R&D credits were reported by businesses in 2019.
How to Know if Your Company is Eligible?
The R&D Tax Credit is for businesses of all sizes and does not just include large, major corporations that have research labs on the premises. Because eligibility is also not limited to only product development- extending to software development, quality improvements, and new manufacturing processes, more companies are eligible than they may realize.
If your organization performs any of the following actions, it may qualify for the R&D Tax Credit:
- Provides Improvements to existing products
- Develops new technology
- Creates new or improves existing production processes
- Improves or develops software
- Employs designers, scientists, or engineers
With a wide range of operations qualifying for a business for the tax credit, James T. Crane and other accounting experts find that may businesses hold misconceptions regarding their eligibility. This includes believing they are not eligible because their business is not solely focused on R&D, developing new processes, products, or systems, or have employees that are not degree-holding scientists or engineers. Because of the specifics of each business, companies that believe they are not eligible for the credit may be- or have components of their operations that can be used for their claim.
James T. Crane, CPA, encourages companies that believe they may be eligible for the tax credit to speak with a tax professional. This will help to determine if any part of current business operations can be put towards the credit.
For companies that are eligible and may have missed out on previous returns, it may be possible to receive the credit retroactively. This means that, depending on when the tax return was filed, the R&D credit may be able to claim for three prior tax years.
How Can a Company Claim the Tax Credit?
The IRS will require documentation to support a clam for an R&D tax credit. To do so, experts strongly recommend maintaining exhaustive record keeping to document activities that will be claimed toward research. This includes establishing how much money the business has put toward operations that qualify as research activities.
Documents to support an R&D tax claim may include:
- Expenses, accounts, and receipts for equipment and/or supplies that are related to R&D
- Invoices or contracts that were paid to third-party partners for R&D
- Meeting and project notes for research
- Payroll records for R&D employees
- Patents, designs, blueprints, or prototypes used for company research
As with determining eligibility, speaking with a CPA or accountant can be a great first step toward claiming the R&D tax credit. Experts find that clients often under-claim the credit, and many have not taken the credit at all. Businesses that have worked hard to succeed with their operations through the difficulties of the pandemic may see the tax credit to invest in infrastructure, hire on fresh staff, and implement technology that inspires further development in R&D.