All types of businesses that carry out R&D in the US are eligible for the Research and Development Tax Credit (R&D). This would mean that whatever type of business you have, you might have the possibility to avail of the said tax credits. In addition to scientists and research labs, a wide range of businesses and sectors are eligible for the R&D tax credit.
It is a common misconception among businesses and entrepreneurs that research and development refer only to research conducted by the business and it conjures the image of a laboratory with sophisticated equipment and scientists in lab coats. But if based on the definition of what constitutes R&D, it does cover a wide range of activities and projects that companies are bound to qualify for.
The caveat is to be able to demonstrate that the activities and projects need to have been funded by the company and charged as expenditures. To encourage research and development in the US, the R&D tax credit was established. More and more businesses use the R&D tax credit each year. The Protecting Americans from Tax Hikes (PATH) Act of 2015 also made the R&D tax credits permanent and expanded their availability to startups.
Thus, the government has been able to provide incentives to businesses in the country that actively engages in improving their R&D efforts via this tax credit. As more companies have realized that this tax credit can be substantial and will help the company in either lowering tax dues or having an extra cash flow can be beneficial to the company.
There is now a steady market for the services of tax consultants that can help the company prepare the needed documents and evidence to ensure that they are eligible for the tax break and that they can file a claim during the filing of the tax returns for a given year. The thing is, there is now a surge of interest in the R&D Tax Credit, and consultants and firms have become in demand that being able to get one for your company might be difficult to do at the moment.
R&D Tax Credit Eligibility Guidelines
A business owner may study the federal guidelines on the eligibility criteria for R&D tax credits to ensure that they will be able to correctly identify the research and development projects and expenses on which the tax credit will be based. It is the responsibility of the company to determine which activities and expenses will fall under R&D and this can range from new product development, design of new equipment, processes, and systems, the development of new software or automation of production or standard operating procedures, the use of innovative techniques and even the discovery of new materials and supplies.
Also, the company should be able to demonstrate that these activities had been paid for by them and that there is a clear paper trail and evidence to this effect. For example, if you invited an expert to conduct training on using a new computer program and you compensated the experts with their industry rates, then that could easily qualify as R&D activities and costs.
However, if you just gave the experts a token and a certificate of appreciation, then that would not be considered an R&D expense and will not be included in the tax credit computation. It is not enough to have just conducted the activity but also to demonstrate that it was really paid for by the company.
On the other hand, the supporting evidence for the said R&D activities and expenses needs to be as detailed as possible and information should be supported by processes and systems in place in the company. Considering that there is no limit to the R&D tax credit that a company can claim, it is given that the IRS will be very strict in its evaluations and audit of the submitted claims.
R&D Tax Credit Filing
Presently, there still are two methods used to determine the relevant R&D tax credits for a certain firm. The standard credit technique is the first, and the alternative simplified credit method is the second. Details on each calculating technique can be found in the Credit for Increasing Research Activities Form or IRS Form 6765.
Additionally, the business owner has the option of choosing the computation approach that will result in the most value for the company’s tax credit. The approaches have advantageous and disadvantageous effects, and as such, the taxpayers must be knowledgeable about both in order to select the most advantageous one. The decision of whether the tax credit is most advantageous for a firm will require assistance if the owner has never applied for this kind of credit before.
The business owner can seek help from organizations that are experts in R&D tax credit filings; the organization is often composed of auditors, engineers, attorneys, accountants, and technical writers who can assist in giving the necessary computation. Therefore, as a result, the approach that the company owner chooses will be used for subsequent filings each year.
Whatever method is employed, the tax credit amount will be determined depending on the amount spent on research and development; as a result, if one wants to maximize their tax credits, they must increase their R&D expenditures and activities. You can find R&D tax credit consultants on the internet as many have offered their services online but still goes through the actual site inspection for good measure.
So, to avoid further expenses, it is better to hire a local firm that can easily conduct the audit and the site visit. Moreover, most consultants will charge their fees based on the amount that can be claimed from the tax credits and if for some reason the company will not be qualified for that year, then the firms will not deduct any fees too. This is a win-win situation for both parties, the business can go into the process with very little risk and the consultants will do their best to help the company qualify because it is the only way that they will get paid.
