The R&D tax credit, formally known as the Credit for Increasing Research Activities, represents a significant opportunity for innovative businesses to reduce their federal tax liability. According to the Organization for Economic Co-operation and Development, more than 25,000 businesses across the country receive some tax relief from this program every year.
Could your business be eligible for this tax credit? The R&D tax credit has stringent eligibility and application requirements that can prove difficult for your organization to navigate. In most cases, working with seasoned business tax specialists is the best way to find out if and how your business can benefit.
This R&D tax credit questionnaire will cover the most important criteria that determine whether or not your business will qualify. Even if your business checks only some, but not all, of these boxes, it’s well worth reaching out to get a definite answer.
Do You Meet the Basic Qualifications?
First, your business must be located in the US, and your R&D activities must take place within the country. Second, you must have eligible expenses in the current or prior two tax years – the IRS allows one to amend taxes for 3 years from filing or due date (whichever is later). Beyond this, there are requirements to establish the R&D nature of your activities.
Do You Have a Federal Tax Liability?
The research and development tax offsets, on a dollar-per-dollar basis, future federal income tax liability. The tax credit can also carry over for up to 20 years, so even if you don’t have a federal income tax liability this year, then it is still well worth investigating your eligibility for the R&D tax credit.
- Comment: As long as the income tax return is filed timely, in the first 5 years of operations, and the R&D credit is part of it, then the credit can be applied to federal payroll taxes. This would be beneficial to companies even if they are not yet making a profit.
Does Your Business Have a Qualified Purpose?
The R&D tax credit uses a four-part test to establish basic eligibility. The business component is based on whether or not your business has a permitted purpose. The activities your organization undertakes must be to improve the performance, function, reliability, or quality of a process, product, software, formula, or invention. Your business must also intend to sell, lease, or license the results of your research.
Are You Eliminating Uncertainty?
Qualified research activities must be related to eliminating some type of uncertainty. Basically, is your organization working toward answering some kind of question about the viability, methods, capability, or design of the specific topic of your research?
Are You Working Through Experimentation?
The tax benefits provided by this credit are meant to support research and development, so your organization must be performing those activities. You need to be evaluating, modeling, discussing, development, or testing something in order to be performing research.
Is Your Business Working in Technology?
To qualify for the R&D tax credit, your organization’s research and development must be related to technology. This can mean a broad range of categories, including physics, biology, chemistry, engineering, and computer science, but not necessarily restricted to that list.
Credit: Chokniti Khongchum
Does Your Business Qualify for the Payroll Tax Offset?
Along with the income tax relief provided by the Credit for Increasing Research Activities, your business may also qualify for the additional credit to offset payroll tax that was introduced in 2015. In fact, the Inflation Reduction Act recently doubled the maximum benefit from $250,000 to $500,000.
This benefit is specifically for startups and small businesses. To qualify, your business must have no more than five years of gross receipts (i.e., revenue), and your business’s gross receipts (i.e., revenue) for the current taxable year must be less than $5 million.
Could Your Organization Benefit From State R&D Tax Credits?
Alongside the federal R&D tax credit, the majority of states offer similar benefits for state taxes. Most states follow the same guidelines for eligibility as the federal credit, although there are exceptions. Connecticut and California are two notable examples where definitions of expenditures and receipts vary. These benefits can be considerable and are well worth investigating alongside your federal eligibility.
What Expenses Qualify for R&D Tax Credit Calculation?
If this R&D tax credit questionnaire points to your organization having a good chance of eligibility, you should understand which types of expenses can count toward your R&D tax credit calculation.
Taxable wages and the cost of supplies used in qualified activities are among the most significant categories. Supplies also include certain utilities but not capital items. You can also claim 65 to 100% of contract research expenses. Rentals and leases of various types of equipment are also eligible.
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You’ll also have to calculate a base amount from your gross receipts (i.e., revenue) over the last four years. The fixed base percentage can be complex, so there is also the alternative simplified credit (ASC) method that relies on your last four years of qualified research expenses instead.
Am I Ready to Apply for the R&D Tax Credit?
The R&D tax credit has an incredibly stringent application process. Any organization applying must ensure that they have their documentation in order. You will need clear records, including financial information and tax returns, but also project proposals, publication records, and even testimony from employees to establish your claim.
R&D tax credit compliance can be a significant undertaking, and the rules update every year. If you don’t get the support your business needs to handle your application, you could miss out on benefits or even incur penalties.
Working With a Tax Credit Advisor
If you’re interested in securing the R&D tax credit for your organization, the best route forward is to work with a qualified tax credit advisor. Even with all of this information, navigating the process can be challenging. To maximize your tax savings, you can count on the professional team here at indinero.
Our industry experts can provide a one-stop shop for all of your financial strategy and tax needs. Our specialized tax mitigation expertise will provide your business with the full benefit of the R&D tax credit and other opportunities. Reach out today to speak with one of our experts about how your business can maximize its tax savings.
Featured Photo Credit: Anna Shvets