There are many valuable economic incentives offered by the government to help businesses reduce current and/or future tax liabilities. One incentive program in particular, known as the Research and Development Tax Credit, rewards businesses for their investment in domestic research. Those that qualify can then use the additional source of revenue to stay competitive, hire additional employees, and enhance day-to-day operations.
WHAT IS THE R&D TAX CREDIT PROGRAM?
The R&D Tax Credit was first introduced in 1981 as a way to encourage innovation throughout the economy, create and retain technical jobs and increase global competitiveness. It is available to any business that develops new or improved products, processes or software systems. This means that businesses of all sizes and in a variety of industries can be eligible to claim this tax credit, not just major corporations with research labs. Taking advantage of the R&D Tax Credit can help taxpayers alleviate some of the financial burden in trying to remain competitive in their respective industries.
WHAT ACTIVITIES QUALIFY?
Companies that invest money, resources and time towards improving a product, technique, formula, process or software, or inventing of a new product or process, likely qualify. Below are common qualifying research and development activities:
- Designing or developing new or improved products, processes, or formulas
- Developing new or improved software technologies
- Evaluating and testing new concepts or materials
- Developing models or protypes
- 3D or CAD modeling
- Beta testing
HOW DOES THE R&D TAX CREDIT WORK?
The R&D Tax Credit can apply to any business that incurs expenses for performing qualified research activities. The following are the types of qualified research expenses that the credit is comprised of:
- Wages paid to employees directly working on, supporting, or supervising the R&D process
- Supplies consumed during the R&D process (ie, for prototyping and testing purposes)
- Payments made to outside contractors hired by the taxpayer to assist in the development process
RECENT CHANGES TO THE R&D TAX CREDIT
Although billions of dollars worth of R&D tax credits have been claimed, many taxpayers still faced hurdles in being able to take advantage of the tax credit despite having qualifying activities and expenses. This was mainly due to the fact that companies losing money could not monetize the credit, and that the credit could only offset regular tax liability. When the PATH Act was signed in December 2015, the R&D tax credit was not only made permanent, but it also removed some of the barriers that many start-up companies faced to claim the tax credit.
The PATH Act now allows eligible small businesses to use up to $250,000 of R&D credits annually against payroll tax liability.
WORKING WITH INCENTAX
Staying competitive by developing new or improved products or software systems can be extremely expensive and time consuming for businesses. Such innovations often fail, leaving companies with no return on their investment. By claiming the R&D tax credit, businesses are able to alleviate some of the financial burden associated with such risky initiatives.
It is important to mention that maintaining documentation related to a taxpayer’s R&D activities can form the basis of a successful R&D credit claim. Therefore, it is important to work with tax credit professionals like Incentax who can assist with the process.
Contact us today to conduct R&D study for your business.