What’s the R&D Tax Credit?
R&D stands for research and development. Chances are, your business qualifies for these tax savings if:
- You’re innovating in the USA
- Your company is inventing, improving, or optimizing current processes
- Your company is creating, revising, and improving products
How Does the R&D Tax Credit Work?
Essentially, if a US-based business is investing in innovation or improvements, we can document certain expenditures associated with those processes. In turn, those activities can qualify for the credit, thus lowering the company’s tax bill and liabilities.
How Far Back Can You Claim R&D Tax Credits?
Many of our clients wonder, just how far back can they go to claim R&D tax credits?
The good news is, R&D tax credits can be applied retroactively. On average, our clients claim the credit back four years. But sometimes, you can go back even further.
How to Account for R&D Tax Credits?
The most common question we get is how to account for R&D tax credits.
What you need is:
- An airtight documentation system built with best practices
- A way to track your qualifying activities and qualifying expenses
You can organize via department, through a ledger allocation, or something else entirely.
Are R&D tax credits refundable?
You technically can’t get a refund via the R&D tax credit program. But the way these credits are monetized is to directly lower the amount of tax you pay.
Overall, the credit reduces corporate tax liabilities, and it also lowers individual tax obligations. Many of our clients find the tax credits much more advantageous than a straight refund.
Is R&D Tax Credit State Aid?
We’ve recently gotten a lot of questions from new clients wondering if R&D tax credits are part of a state aid program. They are not. R&D tax credits are directly from the revenue agencies, and have been in existence since the 1980s.
What Expenses Qualify for R&D Tax Credit?
Many expenses can qualify for the R&D tax credit. Primarily, these tax credits are labor-driven. In most instances, what you pay employees and contractors to perform qualifying activities will be your biggest expenses you’ll use to qualify for the credit. Supply costs and speciality tools and equipment can also be used to qualify.
Are R&D Tax Credits Taxable?
No. R&D tax credits are not taxable as income.
How are R&D Tax Credits Calculated?
Calculating R&D tax credits is complex. But essentially, we start the calculation process by looking at what qualifying activities a company has and the allocated expenses directed at those activities. That expense becomes the pool of those applicable costs. Then, depending on state and federal guidelines, the credit is calculated from that total expense pool.
Can I Claim R&D Tax Credits?
To see if you qualify, we start by looking at your industry.
Certain industries, such as manufacturing and technology, tend to lean heavily on the processes and activities, mainly improvement and innovation, that will most likely qualify them for the credit. But even if your company is not in these industries, we’ll look at your processes to see if you qualify.
What is an R&D Tax Credit?
R&D tax credits were established to help organizations lower their overall tax burdens. Specifically, an R&D tax credit is for lowering a business’s or individual’s tax bill based on what they’re paying for innovation, process improvement, or research.
How Much is the R&D Tax Credit?
Calculating how much the R&D tax credit is worth will vary company to company. Depending on how much the company is spending on research and development qualifying activities, the credit could pay for the business’s payroll taxes, and up to 100K plus credits for companies that are heavily invested in R&D tax credit qualifying activities.
Does Enterprise Software Qualify for R&D Tax Credit?
In many cases, yes, investing in enterprise (ERP) software will qualify for the credit. The act of implementing ERP software is a process-improvement initiative. Depending on exactly what’s being improved with the ERP software would qualify a company for the credit.
Does My Project Qualify for R&D Tax Credits?
A project qualifying for the credit would depend on whether or not the initiative is part of innovation or improvement efforts. That effort doesn’t need to be a revolutionary innovation — it just has to be an evolution for the company.
So, manufacturing a new product, even if the product has been on the market before through a competitor, could qualify since it’s a new innovation for your business.
What are Qualifying Research Activities in Manufacturing for R&D Tax Credit?
For manufacturing specifically, there are many R&D tax qualifying activities. Most commonly, these activities are found in the pre-production phase. Routing, processing, specialty tooling and equipment, etc, those activities associated with determining manufacturing ability and processes, and approving them, are often qualifying activities.
What are Qualifying Research Activities in Construction for R&D Tax Credit?
Construction companies typically engage in many activities that would qualify them for the R&D tax credit. As technology evolves, things like pre-design, off-site modeling, looking at value engineering, etc. all of those activities and much more often have some elements of a qualifying expense.
What are Qualifying Research Activities in Engineering & Architecture for R&D Tax Credit?
Engineering and architecture firms are excellent candidates for the R&D tax credit. Many of the activities they engage in will have associated expenses that will qualify. Pre-production activities are typically brand new to the company and sometimes the industry itself.
The key is, the organization must be billing at a fixed-fee, versus time and material billing.
What are Qualifying Research Activities in Software Technology for R&D Tax Credit?
Software and technology firms are the gold standard for research and development tax credits. These companies engage in a myriad of activities like programming, strategy, and revamping existing technologies. All of these activities will generally qualify them for the tax credit.
What are Qualifying Research Activities in the Medical Device Industry for R&D Tax Credit?
Generally, the medical device industry engages in a lot of R&D qualifying activities. Anything from concept all the way through design, reproduction, prototype, and more, will result in a high-level of expenses for research and development that qualifies for the credit.
What are Qualifying Research Activities in Cannabis Cultivation for R&D Tax Credit?
The cannabis cultivation industry is rapidly evolving its technological processes and systems, including increasing production, improving timelines, product delivery, and more, thus qualifying cannabis brands for R&D tax credit savings.
Currently, R&D tax credits for cannabis companies are given at the state level.
Can R&D Credit Offset Payroll Taxes?
In some cases, R&D tax credits can offset payroll taxes. But it depends. For one thing, there are rules in place for startups. If a startup is under five million in revenue, or has been in business for less than five years, you can elect to offset payroll taxes in lieu of corporate or individual taxes.
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