How to Qualify for the R&D Tax Credit
Have you heard about the R&D tax credit? You can (probably) qualify for it.
The R&D tax credit has the potential to reduce your businesses income tax liabilities, and if you cannot use it immediately, it can be carried forward for up to 20 years! As with other tax credits, there are many misconceptions and confusion revolving around qualifying and using the credit. The good news is that in 2015 it became a permanent tax credit. Your company can even look back on previous years (up to the past 4 years) for missed tax credit opportunities.
What is the R&D tax credit?
The R&D tax credit reduces the tax liability for companies who develop new or improved business components. These can include products, processes, computer software, techniques, formulas and inventions that produce new or improved functionality, performance, reliability or quality. It is available on the Federal and State level.
Who is eligible?
Any business that creates new products or improves existing products or develops processes, patents, prototypes or software. Companies that hire designers, engineers and scientists to conduct experiments are also eligible.
Even if you don’t have federal tax liability, the R&D tax can offset the FICA portions of your payroll taxes. All companies that conduct any type of research and development qualify, even if you do not have an R&D department. Employees running the experiments do not have to hold a degree! As long as the employees are experimenting using processes backed by science, you may be eligible. Products and processes do not have to be brand new; it just has to be new to your company.
The 4 Questions for Eligibility
- Does the purpose of research create a new or improved business component?
- Has the company attempted to eliminate uncertainty about the product or component?
- Has the company engaged in the process of experimentation?
- Has the process of experimentation been based on sciences such as engineering, physics, chemistry, biology, or computer science?
What documentation is needed?
Of course you will need documentation to claim this credit. Acceptable documentation includes payroll records, general ledger expense detail reports, project lists and notes, lab results and email communication regarding the experimentation process.
How to Qualify for the R&D Tax Credit
The R&D tax credit is not as complicated as it seems and can reduce your company’s tax liability, possibly retroactively! Don’t let this opportunity pass you by!
Let us know how we can help you plan for this credit by contacting us today.