Research and Development Tax Credits
The research and development (R&D) tax credit is a permanent federal tax incentive meant to stimulate innovation, technical design and manufacturing within the U.S. Two-thirds of U.S. states also offer an R&D tax credit. Today, the R&D tax credit is one of the most significant domestic tax credits remaining under current tax law—a substantial tool maximizing a company’s cash flow and bottom line.
Watch our video below for an overview on R&D tax credits.
Does Your Business Qualify for R&D Tax Credits?
There are many misperceptions about which professions and industries can qualify for R&D tax credits. Companies of all sizes and in many different industries can now qualify for these dollar-for-dollar tax credits, including:
- Architectural and engineering firms
- Software developers
- Tool and die / job shops
- Plastic mold injection
- Software developers
- Construction contractors
- Food processors
- Chemical companies
- Apparel/textile companies
Less than one-third of eligible companies realize they qualify for the R&D tax credit.
Start-up companies are not excluded – companies with less than $5 million of gross receipts for the year, and no gross receipts more than five years ago – can apply to use R&D credits to reduce a portion of their federal payroll taxes going forward, specifically the employer’s Social Security portion of FICA taxes (6.2% of wages up to $127,200 per employee in 2017).
Recent tax changes also enable private companies with $50 million or less in gross receipts (prior three-year average) to use R&D credits to reduce alternative minimum tax (AMT).
Activities Qualifying for the R&D Tax Credit
Companies no longer need to develop a product or process that is new to their industry; it only needs to be new to them. Examples include:
- Developing or formulating new or improved products
- Functionally enhancing existing products or formulas
- Developing new or improved production processes
- Assisting customers with technical problem-solving
- Developing new or improved software for use or sale
- Applying for patents and prototyping
How to Determine if You Qualify for R&D Tax Credits – The Four-Part Test
A simple four-part test helps to determine which activities constitute qualified research according to criteria established by the IRS:
- Permitted Purpose: The activities must relate to new or improved business components, function, performance, reliability and quality.
- Technological in Nature: The activity performed must fundamentally rely on principles of physical or biological science, engineering and computer science.
- Elimination of Uncertainty: The activity must be intended to discover information to eliminate uncertainty concerning the capability, method or design for developing or improving a product or process.
- Process of Experimentation: The taxpayer must engage in an evaluative process that can identify and evaluate more than one alternative to achieve a result. This may include modeling, simulation or a systematic trial and error methodology.
Expertise from Our R&D Tax Credit Consultants: The R&D Tax Credit Study
Claiming R&D tax credits requires a fair amount of documentation required by the IRS, and that’s why it’s important to seek the guidance of R&D tax credit professionals with strong expertise in helping business owners successfully claim these valuable tax credits.
The R&D tax credit consultants at Engineered Tax Services dig much deeper into the fundamentals of your business activities—incorporating operations, engineering, financial and tax expertise that results in more credits and meticulous documentation that is necessary to support your activities, costs and credit.
There is a direct correlation between the amount of your defensible credit and the expertise of the advisor performing the tax credit study.
We can typically conduct a study for all open tax years, the current year and the prior three years. Any unused credits carry forward for 20 years. These credits can result in significant refunds from prior years and a substantial reduction in federal and state income taxes in the current and future years.
R&D Case Studies
- Architectural and Engineering Firm
- $417,598 R&D Tax Credits/Cash Refunds
- Annual Revenue: $13 million
- Software Developer
- $923,191 R&D Tax Credits/Cash Refunds
- Annual Revenue: $10 million
- Architectural Firm
- $232,756 R&D Tax Credits/Cash Refunds
- Annual Revenue: $10 million
- Manufacturer/Machine Shop
- $393,098 R&D Tax Credits/Cash Refunds
- Annual Revenue: $12 million
- General Contractor
- $680,000 R&D Tax Credits/Cash Refunds
- Annual Revenue $200 million
Services to CPA Firms: Our Expert Network of R&D Tax Credit Partners
ETS works with CPA firms across the country to help their clients identify and capture federal and state R&D tax credits. Our R&D tax credit experts, comprised of attorneys, CPAs and engineers, conduct a thorough and yet non-evasive analysis into a company’s operations to identify all qualifying R&D credit activities and related expenditures in order to maximize the company’s credits.
- Tips for Simplifying the Documentation Process for Claiming R&D Tax Credits
- State R&D Tax Credits: The Double Benefit
- Manufacturers Can Benefit From the R&D Tax Credit
- Research and Development Tax Credit for the Software Industry
- Startups Should Take Advantage of the R&D Tax Credit
To learn more about how ETS can assist you with R&D tax credit services, please complete the form below or contact us at (800) 236-6519.