The Credit For Increasing Research Activities or R&D tax credit allows businesses to claim credits for activities related to research and development.
Despite its benefits, several misconceptions prevail. Many taxpayers believe that the credit only applies to large research or healthcare organizations. Meanwhile, others think that businesses must be successful in their R&D activities to qualify.
To help your clients determine whether they’re eligible for tax liability relief, asking the right questions is critical. Let’s look at some ways to make sure that your clients receive the maximum R&D credit.
FIND OUT IF YOUR CLIENT QUALIFIES FOR AN R&D CREDIT
The first step is to find out if someone actually qualifies for this type of credit. Ask your clients the following questions:
- Is your business involved in creating new products or upgrading existing products?
- Do you employ software developers, engineers, or a dedicated R&D department that performs research for your business?
- Do you outsource R&D to outside vendors?
R&D, while often associated with the software and medical sectors, also applies to a wide range of industries, such as car manufacturing and food & beverage.
Companies in these sectors develop new foods, beverages, types of vehicles, or prototypes of new products. It isn’t essential for businesses to conduct research pertaining to new breakthroughs or inventions to qualify for the credit.
WHAT TYPE OF RESEARCH DOESN’T QUALIFY?
There are certain types of research that can’t be used to claim an R&D credit. This includes:
- Research conducted outside the United States
- Data collection for the purposes of market research
- Basic testing of products or equipment for quality control
HOW MUCH DID YOUR CLIENT SPEND ON R&D?
To make sure your clients receive the credits they’re eligible for, make sure they list all relevant expenses, such as:
- Materials used for R & D such as supplies, tools, and machinery
- Rental costs for technology and services. For example, in software development, this may include hardware rental and cloud storage fees.
- Taxable wages paid to employees engaged in these activities
- Funds spent on outsourcing R&D. This may include fees paid to laboratories for testing as well as the wages of employees or independent contractors who perform testing.
- Has R&D spending increased, decreased, or remained static compared to prior years? The largest credits go to businesses where these expenses have increased. However, those with static or decreasing expenses, however, can qualify for smaller credits.
R&D CREDIT CAN APPLY TO BOTH INCOME AND PAYROLL TAXES
Keep in mind that the R&D credit isn’t only for income taxes. It may also be used by qualified businesses to offset payroll taxes of up to $250,000. However, these businesses must not have had any gross receipts prior to the five-year period ending in the current tax year.
In addition, they must not have more than $5 million in gross receipts in the current tax year. If the credit exceeds the payroll taxes owed, the remainder can be carried forward to the next quarterly return.
Taxpayers can benefit from the credit even if they don’t owe any income taxes this year. If they paid taxes last year, credits can be applied to the previous year to offset taxes paid.
WHAT ABOUT AMT?
Small businesses that pay alternative minimum tax (AMT) can use R&D tax credits, as well. The only limitations are that their average gross receipts for the last three tax years must not exceed $50 million dollars. Publicly-traded companies that pay AMT are excluded, however.
MAKE SURE YOUR CLIENTS GET THE MAXIMUM R&D CREDIT
For any business engaged in research and development, the R&D credit can be a beneficial way to save money on income and payroll taxes. Be sure to ask your clients the right questions to see if they qualify.
At Incentax, our tax credit experts can help taxpayers identify the maximum state and federal tax credits they qualify for. To learn more, contact us today.