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 a research & development incentive. Today, the research & development credit is one of the most significant domestic deductions 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 research & development credits.
Does Your Business Qualify for research & development Credits?
There are many misperceptions about which professions and industries can qualify for research and development incentive. Companies of all sizes and in many different industries can now qualify for these dollar-for-dollar 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 research and development incentive.
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 research and development 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 changes also enable private companies with $50 million or less in gross receipts (prior three-year average) to use research and development credits to reduce alternative minimum tax (AMT).
Activities Qualifying for the Research and Development 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 Research and Development 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 Research and Development Consultants
Claiming research & development incentive requires a fair amount of documentation required by the IRS, and that’s why it’s important to seek the guidance of professionals with strong expertise in helping business owners successfully claim these valuable incentives.
The consultants at Engineered Tax Services dig much deeper into the fundamentals of your business activities—incorporating operations, engineering, financial, and expertise that results in more deductions 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 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.
Research and Development Case Studies
- Architectural and Engineering Firm
- $417,598 Cash Refunds for R&D
- Annual Revenue: $13 million
- Software Developer
- $923,191 Cash Refunds for R&D
- Annual Revenue: $10 million
- Architectural Firm
- $232,756 Cash Refunds for R&D
- Annual Revenue: $10 million
- Manufacturer/Machine Shop
- $393,098 Cash Refunds for R&D
- Annual Revenue: $12 million
- General Contractor
- $680,000 Cash Refunds for R&D
- Annual Revenue $200 million
Services to CPA Firms: Our Expert Network of Partners
ETS works with CPA firms across the country to help their clients identify and capture federal and state research and development credits. Our experts, comprised of attorneys, CPAs and engineers, conduct a thorough and yet non-evasive analysis into a company’s operations to identify all qualifying research and development credit activities and related expenditures in order to maximize the company’s credits.
- Tips for Simplifying the Documentation Process for Claiming R&D Incentives
- State Research and Development Tax Credits: The Double Benefit
- Manufacturers Can Benefit From the R&D Deduction
- Research and Development for the Software Industry
- Startups Should Take Advantage of the R&D Credit
To learn more about how ETS can assist you with research & development services, please complete the form below or contact us at (800) 236-6519.