Innovation is the lifeblood of your business. But did you know that your efforts towards creating new or improved products, processes, or software could qualify for significant tax savings? At Engineered Tax Services, we're here to help you capitalize on the Research & Development (R&D) Tax Credit.
Kickstart your journey by consulting with our R&D tax credit specialists and discover how much you could potentially save with a complimentary tax credit analysis today!
R&D Tax Credit Services
BILL UPDATES TO DOMESTIC EXPENDITURES:
There are two scenarios for domestic R&E expenditures: clients with more than 31Million in Gross Receipts and clients who are under that.
- In making that determination, you have to look at the GRs of the whole controlled group, if there is one, not the individual entity.
- The $31 million standard is judged by the average of the gross receipts for 2022-2024.
- Starting in the 2025 tax year (to be filed in 2026), you will no longer have to amortize your research and experimentation expenditures.
- If you were amortizing during 2022-2024, then starting in 2025, you will be able to elect either to deduct the remaining amounts you have charged to your capital accounts in 2025, or split it ratably between 2025 and 2026.
- If you did not amortize during 2022-2024. The requirement is still in place for you, so if you went back to amend those years, you would still have to amortize in those years.
- The ability to deduct R&E expenditures in the current year is retroactive back to 2022.
- If you filed the R&D credit in 2022-2024 and you did NOT amortize, congratulations, you are no longer in violation of federal law and no action is required.
- If you filed the R&D Credit in 2022-2024 and you DID amortize, you don’t need to do anything right now but starting in 2025, you will be able to elect either to deduct the remaining amounts you have charged to your capital accounts in 2025, or split it ratably between 2025 and 2026.
- If you took the R&D credit in one or two years from the relevant period (let’s say just 2022) and you did the amortization:
- For the amount still in your capital account from 2022, during your 2025 filing you will be able to elect to deduct the remaining amounts you have charged to your capital accounts in 2025, or split it ratably between 2025 and 2026.
- For the 2023 and 2024 tax year, you will be able to amend to take the R&D credit without amortizing, but you will need a 3115 because that will represent a change in accounting method from what you did in 2022.
- If you did not take the R&D credit or do any amortization in 2022-2024, you can now go back and amend to take the R&D credit for those years without having to do any amortization.
- The bill only says that the taxpayer will be able to “elect” either to deduct the remaining amounts you have charged to your capital accounts in 2025, or split it ratably between 2025 and 2026, but not how to make that election.
- The bill says that this will be considered a change in accounting method, so they will need a 3115.
- The bill says that this change will be assumed to be made with the consent of the Secretary, so there should not be any problems of rejections.
What Is The Research & Development (R&D) Tax Credit?
The R&D tax credit offers a dollar-for-dollar reduction in a company’s tax liability, or payroll taxes, aiming to encourage innovation and technological advancements in the U.S. It is calculated based on a company’s eligible wages, technical consultants, and consumables for experimentation. The federal tax credit averages *14% of eligible costs. (*the tax credit percentage is subject to prior 3-year average and current accounting principles)
Do I Qualify?
R&D incentives are available for a variety of activities and expenses. These include software development, payroll expenses related to R&D activities, the creation of new manufacturing processes, and product innovation, among others.
Activities that would otherwise be considered “day-to-day operations,” such as designing new products or analyzing market trends, are eligible under this credit!
The Four-Part Test
To qualify, the IRS has a four-part test you must pass to be eligible to claim the incentives. Most companies don’t know that the development and research activities they’re currently doing might already qualify for this tax credit, and below we will explain each section of the four-part test.
The company needs to be trying to develop a new or improved business component. These activities do not need to be successful endeavors. Whether you’re successful or unsuccessful, these activities may still qualify for pass this part of the test. As defined in the IRS regulations, the business components include:
- Product
- Process
- Technique
- Invention
- Formula
- Software
The activities must be technological and must involve hard sciences such as:
- Engineering
- Physics
- Biology
- Computer Science
- Chemistry
Qualified research activities must be performed to eliminate technical uncertainties. Even if the company knows the research project’s objectives can be achieved, expenditures can still qualify, provided there’s some uncertainty at the onset when the company is trying to develop a new or improved business component. However, there only needs to be uncertainty regarding one of three things:
- Can they do it?
- How would they do it?
- The ultimate or appropriate design of what they are trying to develop.
The company must evaluate different alternatives when trying to develop the new or improved business component. Examples of this include:
- Systematic trial and error
- Modeling
- Simulation
Does My Industry Qualify?
Answer: Companies of all sizes and industries can qualify for this tax credit.
Qualifying Activity Examples: Learn about the specific qualifying activities in your industry by clicking the links below:
Benefits of the R&D Incentives
Do Start-Ups Qualify?
R&D incentives can be ideal for startups—particularly those of a technical nature, such as in the fields of computer science or pharmaceuticals. The credits can deliver a financial windfall to qualifying taxpayers, but the unique circumstances of startups entail challenges. As a result, it’s wise to engage a seasoned tax and engineering specialty firm.
Does My State Have A Research and Development Tax Credit Program?
Learn more about which states have an R&D credit program with our the map below. Click your state to gather initial details on your state's available credits. Each state has a link to its .gov website for the tax credit program itself or the tax credits and incentives page. Keep in mind, these state credits are in-addition to the federal tax credit, which you may qualify for both.
How We Help You Get Your Tax Savings
What to expect when working with Engineered Tax Services.
Wondering what to expect when you work with Engineered Tax Services? Our mission is to simplify the complicated process of applying for and securing lucrative research and development credits, allowing you to focus on growing your business through continued innovation. While each client's situation is unique, we follow a general roadmap as detailed below:
- Initial Consultation: You reach out to us, and we help ascertain your eligibility for Research credits based on the IRS’s four-part test.
- Kick-off Call: We schedule a meeting involving all significant stakeholders. During this session, we assign a tax attorney or industry expert who will serve as your dedicated project manager throughout the entire process.
- Documentation Collection: We request specific documentation that will be instrumental in calculating your tax credits and substantiating your claims in the event of an IRS audit. These documents will vary according to your specific circumstances and may include:
- Employee listings, their W2 box 1 wages and their work locations
- A rundown of projects/initiatives undertaken during the tax years
- Time tracking reports highlighting employee efforts
- Copies of project contracts/master agreements
- Records of expenses paid to consultants on an hourly/T&M basis
- Expenses related to computer rental/cloud services used in development
- An inventory of raw materials/supply costs utilized in development
- Copies of previous years’ tax returns
- Organizational charts, workflow documentation, product information, etc.
- Data Review: We meticulously examine your records to pinpoint all Qualified Research Activities (QREs), which might encompass employee wages, supply costs and contract research expenses.
- Data Analysis and Interviews: We carry out comprehensive data analysis and conduct technical interviews as necessary to gather further information.
- Tax Credit Form Provision: We prepare and provide you and your CPA with the appropriate federal and/or state tax credit forms.
- Final Report Delivery: We compile and send the final R&D report to both you and your CPA.
Our carefully designed and implemented process ensures you receive the tax savings you are entitled to while you continue to focus on the growth and success of your business.
Take the Next Step Towards Tax Savings Today
At Engineered Tax Services, we're committed to helping you unlock your potential tax savings. Don't miss out on the opportunity to enhance your company's financial standing through R&D incentives. Our team of experts is ready to guide you through this intricate process. Contact us
Getting an R&D Credit Estimate to see if you qualify is the first step!
eBook: The Architect's Guide to R&D Tax Credits
This comprehensive e-book is designed to help you recognize which of your activities qualify for R&D credits!
Whitepaper: R&D Tax Credits
How can R&D tax credits propel your business to the next level of success?
This comprehensive white paper explains how your company can be rewarded for innovation via a substantial tax break, but one that less than one-third of companies entitled to the credit know they’re eligible. With special chapters on R&D credits for startups and for software and gaming.
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