The Tax Cuts and Jobs Act (TCJA)
was signed into…
The Tax Cuts and Jobs Act (TCJA)
Specialty R&D Tax Areas
The Research and Development Tax Credit is a permanent federal tax incentive meant to stimulate innovation, technical design and manufacturing within the U.S. Most states have a similar tax incentive as well. While the R&D Tax Credit was available since 1981, tax regulations that were finalized in December 2003 significantly increased the types of activities that qualify for the credit.
Companies no longer need to develop a product or process that was new to their industry, it only needed to be new to them. Companies of all sizes and in many different industries can now qualify for these dollar-for-dollar tax credits. Some of the industries that qualify for the credit include manufacturers, tool and die / job shops, plastic mold injection, software developers, architectural and engineering firms, construction contractors, food processors, chemical companies, agribusiness, and apparel/textile companies, among others.
Less than one-third of eligible companies realize they qualify for the R&D tax credit. Also, many of the companies that are taking the credit are not claiming all of the credits to which they are entitled.
Our Expert Network of Research & Development Tax Credit Partners
We work 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 made up 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.
We can typically conduct a study for all open tax years, the current year and the prior three years. Any unused credits carryforward 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.
Two Significant Enhancements to the R&D Tax Credit Beginning in 2016
- Companies with less than $50 million in gross receipts (prior 3 year average) can use R&D credits to reduce Alternative Minimum Tax (AMT). This is very significant, especially for flow-thru entities, whose owners are in or close to AMT every year.
- “Start-up companies” (companies with less than $5 million of gross receipts for the year and no gross receipts more than five years ago) can 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).
The R&D Tax Credit is one of the most significant tax incentives remaining under current tax law – a substantial tool for maximizing a company's cash flow and bottom line.
R&D Case Studies
$417,598 R&D Tax Credits/Cash Refunds
Architectural and Engineering Firm
Annual Revenue $13,000,000
$923,191 R&D Tax Credits/Cash Refunds
Annual Revenue $10,000,000
$232,756 R&D Tax Credits/Cash Refunds
Annual Revenue $10,000,000
$393,098 R&D Tax Credits/Cash Refunds
Annual Revenue $12,000,000
$680,000 R&D Tax Credits/Cash Refunds
Annual Revenue $200,000,000
DO YOUR RESEARCH & DEVELOPMENT (§41) ACTIVITIES QUALIFY FOR THE RESEARCH CREDIT?
- 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
The Research & Development (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. Despite the fact that the R&D credit has been available since 1981, less than a third of eligible companies recognize that they qualify for the credit. Every company improves products and processes to remain competitive, the government rewards them through this tax benefit.
The development activity must be undertaken for the purpose of developing a new or improved “business component.” A business component is any product, process, computer software, technique, formula, or invention, whether held for sale, lease, or license by the company or used in the company's trade or business. The development must relate to a new or improved function of the business component, or to its performance, reliability, or quality. Development relating solely to style, taste, cosmetic, or seasonal design factors will not satisfy this requirement.
This means that the development activities must be intended to discover information that would eliminate uncertainty concerning the development or improvement of a business component. Uncertainty exists if at the outset, the taxpayer is uncertain about (1) if it can develop the business component it wants to develop (Capability), or (2) how to develop the business component it wants to develop (Method), or (3) the appropriate design of the business component it wants to develop.
Discovering Technical Information
This means that the process of experimentation (see below) utilized in the research must fundamentally rely on the principles of the physical or biological sciences, engineering, or computer science. The research cannot be in the “soft” sciences, such as, economics, psychology, management sciences, etc.
Process of Experimentation
To engage in a process of experimentation the development or design activities must involve a process of evaluating one or more alternatives designed to achieve a result where the capability or the method of achieving that result, or the appropriate design of that result, is uncertain at the outset. This may involve developing one or more hypotheses, testing and analyzing the hypotheses, and refining or discarding the hypotheses as part of a design process. Acceptable methods of experimentation include: modeling, simulation, or systematic trial and error.
Internal Use Software
If the development activities are for the development of software that is to be used by the taxpayer in its business, and if the software is not used by the taxpayer in qualified research, a production process, or in providing computer services then the following three-part test must also be satisfied.
1986 Act H.R. Report, 1997 Prop. Regs., and T.D 8930 – To be innovative, the software must be intended to result in a reduction in cost or improvement in speed, or any other improvement, that is substantial and economically significant. Prop. Regs. 66 FR 66362 – The software is innovative in that the software is intended to be unique or novel and is intended to differ in a significant and inventive way from prior software implementations or methods.
Significant Economic Risk
For significant economic risk to exist, the taxpayer must commit substantial resources to the development of the software, and there must be substantial uncertainty that because of technical risk that the resources may not be recovered within a reasonable time.
Software is considered commercially available if the taxpayer can purchase, lease, or license software that meets its business requirements without substantial modification.
Research Tax Credit Videos