The research and development 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.
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:
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).
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:
A simple four-part test helps to determine which activities constitute qualified research according to criteria established by the IRS:
1.
Permitted Purpose: The activities must relate to new or improved business components, function, performance, reliability and quality3.
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.2.
Technological in Nature: The activity performed must fundamentally rely on principles of physical or biological science, engineering and computer science.4.
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.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.
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.
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.
Many of the activities your business already conducts may qualify for significant savings.
Please fill out this form to help us identify if your research & development expenses qualify for the R&D Tax Credit.
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