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research and development tax credit

tech company research and development

Does Your Business Qualify for R&D Tax Credits?

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The topic of Research and Development (R&D) is often associated with images of scientists gathered around a table to discuss complex formulas and space-age discoveries. But did you know that if your company’s staff employs personnel such as software developers, engineers, and machinists, your R&D expenses could qualify for tax credits

Many companies fail to take advantage of this tax credit, unaware that they have qualifying R&D expenses that are approved by the IRS. These do not have to be pioneering inventions or innovative undertakings. Rather, this credit is available to companies that create or improve products and trade processes.  

IRS Criteria for R&D Credits

The federal R&D tax statute provides a credit of up to 10% of qualifying expenses. However, many states also have this credit which can bring the total percentage to as high as 20%. Rules for determining what qualifies as R&D expenses are listed under Internal Revenue Service Code section 41. 

The IRS has a predefined set of criteria that determines what activities satisfy the requirements of qualifying R&D expenses. These are as follows:

  • The activity must have a purpose such as improvements in function, performance, reliability, or quality. Projects related to the appearance of a product do not qualify. 

  • Technical uncertainty related to the capability, methodology, or design of the business. The uncertainty must be attempted to be resolved with experimentation. This does not include any economic uncertainties.
     
  • The project must rely on hard science such as engineering, physical/biological sciences, or computer science. 

Once all the above criteria are met, then related expenses in wages, supplies, and contract research that were incurred during the project can be considered qualified R&D expenses. 

Technology R&D Expenses

According to Accounting Today, here are some of the most commonly overlooked technology expenses that can qualify as R&D expenses: 

  1. Cloud-Computing Costs
    Many companies have harnessed the power of cloud computing which provides an efficient way of storing, processing, and analyzing data. The server, platform, and Software as a Service (SaaS) technology costs included in cloud computing may fall under qualified research expenses (QREs) for both federal and state R&D credits. Development platforms and beta-testing of software are also included in this classification.  

  2. Migration Of System Platforms 
    The complex project of migrating systems to the cloud often involves technical uncertainty and failure, qualifying it as an R&D expense. 

  3. Replacement Of Obsolete Parts
    Should a part from a product become obsolete, redesigning and testing are necessary for a replacement. This process involves technical uncertainty and failures which can be considered R&D expenses. Expenses can include wages of engineers and other associates involved in the redesigning process so long as their contributions are clearly demonstrated. 

  4. Automation Expenses
    Technology that is developed to improve the efficiency of the manufacturing process is considered a QRE. Robotic components are a good example of this as uncertainty exists as to where to place them and what they will do. The cost of the robot itself cannot be included, but the research into where and how they will fit into the process as well as the testing are qualified expenses. 

  5. Artificial Intelligence and Machine Learning
    Artificial intelligence and machine learning are used to improve manufacturing efficiencies. As a result, the research expenses involved in these aspects would also qualify as QREs. 

Other Industries Eligible For R&D Credits

There are many other industries and applications where qualifying R&D expenses can be claimed. The CPA Journal lists several of these in various areas.

Restaurants, for example, may have qualifying expenses such as ways to improve nutrition, safety, and preservation of food. The construction industry involves designing new heating and air conditioning systems as well as new construction techniques. Agriculture involves researching and designing new irrigation systems, harvesting improvements, and new feeding techniques for livestock.

Many taxpaying companies can benefit tremendously from the R&D tax credit. However, millions of dollars go unclaimed yearly since businesses fail to recognize exactly what qualifies for this credit. 

Incentax can help identify and maximize qualifying R&D expenses for your business. Contact us for more information on how you can take advantage of these tax credits.  

r&d payroll tax credit

R&D Payroll Tax Credit: A Startup’s Cash Flow King

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Startup companies across the world kick off operations under a limited budget. This is because it takes a considerable amount of time and effort for small companies to build up capital. 

Coupled with tough economic times and stiff competition from rival companies, startup companies strive to survive the pressure in order to stay afloat. In this case, success never comes along without setbacks and financial constraints. Therefore, it is necessary to roll out strategies that will help the company maintain effective cash flow.

 In other words, cash flow management is critical in the survival of a company. Mismanagement of cash flow can hurt a company’s financial health, leading to bankruptcy and even total collapse. 

How do you achieve your financial objectives? What measures have you put in place to sustain a healthy financial cash flow? The R&D payroll tax credit is a crucial cash management strategy that can significantly help your company save a considerable amount of money incurred in taxes.

Why the R&D Payroll Tax Credit?

The research & development payroll tax credit is an integral aspect of cash management that startup companies need to embrace. Typically, the credit helps your new company to offset payroll taxes. In this case, new companies and startups can apply for the R&D tax credit against taxes incurred on their payroll. 

The tax credit on payroll taxes is rolled out for five years. This helps startups to save a considerable amount of money.

A payroll tax credit reduces the monetary burden of your company through the reduction of income tax paid to the government. In some cases, eligible companies can claim up to $ 250,000 in payroll tax credit per year. This helps you offset a considerable amount of money that could have been inquired in paying taxes. 

Who Qualifies for the R&D Payroll Tax Credit?

To qualify for R&D payroll tax relief, companies are required to have less than $5 million in annual gross receipts to qualify for R&D tax relief. In cases where a business is new, gross receipts must be less than $5 million in limits within 12 months.

Under circumstances where an individual runs similar businesses sharing common ownership, R&D payroll taxes are calculated in a combined format to ascertain eligibility under this category.

The Internal Revenue Service  (IRS) has established the following guidelines about gross receipts in calculating payroll taxes:

  • All the cash received for services rendered
  • Revenue generated from investment and interest income
  • Total sales – referred to as allowances and net returns

Other activities that qualify for R & D payroll tax credit include:

1. Technical Uncertainty

Activities under this segment include efforts to improve a product or service. This may include inventions, software, and techniques. 

2. Experimentation

This includes processes meant to solve a particular technical uncertainty. Some aspects of the process are not limited to systematic trial and error, modeling, or any other method.

3. Technological Tasks

Experimentation relies on sciences. Some aspects of this category include engineering, computer science, and biology. The threshold also includes developing software for internal use.

These activities must be undertaken within the United States and not funded through alternative funding streams.

Unlock the Power of Tax Credits

The R&D payroll tax credit is integral for your new business. It will help you cut on costs inquired in paying taxes and help you grow. Contact us for help in filing for the tax credits you and your business are eligible for.

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The Inside Scoop on R&D Tax Credits

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American companies are spending more on Research and Development each year. The National Science Foundation shows sustained increases in research and development expenses in the US in the years after the 2008 financial crisis, meaning, American companies are trying to innovate and put their money where their mouth is. 

Yet small and medium business owners hear the words “research and development” and they probably envision something outside of what they and their teams are doing on a daily basis.  

When business owners hear “R&D tax credits” it’s easy to think that you need to have a huge department doing rocket science each day and invent the next huge thing to even be considered as a business that does Research and Development. 

Well, R&D tax credits are one of the areas in tax incentives where the little guy can benefit too.  Advocates for the R&D tax credit believe the government could do a better job at educating business owners, regardless of the size, on the tax credits they could be taking advantage of and aren’t. 

What is an R&D Tax Credit and What is it Trying to Get Companies to Do?

What these tax credits are trying to do is incentivize companies through a tax break for doing Research and Development work in the US. Notice, we’re not even saying Research and Development that works.  We’ll get to that in more depth in a bit. The goal is to keep more jobs in the US and reward companies that are trying to innovate. 

What kind of activity qualifies as Research and Development? 

Any activity in your business that involves design, development, and improvement of a product and/or a service may qualify as R&D.  In fact, in 2003, the “Discovery Rule” that was part of this tax credit was removed; instead of having the R&D tax credit only accessible to companies executing research activities “new to the world”  the tax credit became accessible to companies executing research activities that were new to them, or an improvement upon what they were doing before. 

In 2015, the Research and Development tax credit became permanent, and the profit thresholds necessary to qualify where lowered, meaning that startups that weren’t generating a lot of money, but were possibly generating a lot of innovation could benefit too. You just have to pass what’s known as the four-part test to qualify.

Does my company have to invent something new? 

No! You should be able to demonstrate, through documentation your teams are keeping, that the work you’re doing attempts or successfully improves upon a product or service, or develops a new product or service. 

What do I need to document to claim it? 

You need to document the activities you do as part of your research and development, as well as the expenses those activities require. Some examples of documentation that can help support your claim are project briefings or notes, product descriptions or white papers, payroll records and expense reports. 

How small can my business be to qualify for an R&D Tax Credit?

Your business’s revenue has to be less than $5 million in a given year to qualify. You can submit up to five years of evidence as part of your claim and apply it retroactively as far back as 2015. 

What about state taxes?

Make sure to check with your state’s Tax Department for applicable credits in your state. Many states have their own tax incentives for Research and Development, but they vary from state to state. 

How can I find out more about this and start my claim if I qualify? 

Our team of experts at Incentax, LLC knows the tax code in and out and can help you evaluate your individual business situation to find every tax break you can get. Contact us to set up a consultation and learn more about this and other tax credits you may benefit from. 

 

What Is the Research & Development Tax Credit?

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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.