The Research & Development Tax Credit
is available to any company that designs, develops or improves products, prototypes, processes, techniques, inventions, formulas or software.
Companies of any size or revenue can take advantage of the credit. Innovative U.S. companies collectively claim upwards of $10 billion per year in R&D tax credits, making it one of the largest tax credits available.
The R&D Tax Credit was created by Congress in 1981 under the Economic Recovery Tax Act, as a way to help companies in the United States stay competitive within the global marketplace. R&D Tax Credits are a dollar-for-dollar offset against past, present, and future tax liabilities. Plus, unused credits can be carried forward for up to 20 years.
As part of The PATH Act of 2015, the Research & Development Tax Credit was officially made permanent January 1, 2016. Now it is a better time than ever before to claim the credit due to several reasons:
- Companies and their CPAs now have certainty and can strategically plan for the credit every year.
- Eligible startups may use the credit to offset a portion of their payroll tax liability regardless of profitability.
- Companies operating $50 million and under in gross receipts can use the credit to reduce below or offset Alternative Minimum Tax (AMT) limitations. This was one of the biggest hindrances to the credit in the past because eligible companies who generated R&D Tax Credits could not always utilize the credits meaningfully.
- Almost all states offer the R&D tax incentive to supplement the Federal Research & Development Tax Credit.
- U.S. companies can quantify the value of R&D tax incentives and complete their long-term budgeting with confidence.
Indago takes a thorough look through a company’s business activities and how their technical employees and expenditures meet the taxing authorities’ regulations.
When claiming the credit in a study, we must identify and substantiate Qualified Research Activities (QRAs).
Qualified research is an activity or project undertaken by a taxpayer that must meet four IRS requirements:
Permitted Purpose
The purpose of the activity or project must be to create new (or improve existing) functionality, performance, reliability, or quality of a business component. A business component is defined as any product, process, technique, invention, formula, or computer software that the taxpayer intends to hold for sale, lease, license, or actual use in the taxpayer’s trade or business.
Elimination of Uncertainty
The taxpayer must intend to discover information that would eliminate uncertainty concerning the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability of development or improvement, method of development or improvement, or the appropriateness of the business component’s design.
Process of Experimentation
The taxpayer must undergo a systematic process designed to evaluate one or more alternatives to achieve a result where the capability or the method of achieving that result, or the appropriate design of that result, is uncertain as of the beginning of the taxpayer’s research activities. Treasury Regulations define this as broadly as conventional implementation of the scientific method to something as informal as a systematic trial and error process.
Technological in Nature
The process of experimentation used to discover information must fundamentally rely on principles of the physical or biological sciences, engineering, or computer science. A taxpayer may employ existing technologies and may rely on existing principles of the physical or biological sciences, engineering, or computer science to satisfy this requirement.
Once Indago has determined that a company is eligible for the R&D Tax Credit, costs associated with R&D related activities and expenditures are quantified by:
- W-2 Wage Earners
- Outside Contractors/Services
- Supplies