Research & Development Tax Credit

The following facts were posted in regards to actual R&D credits claimed over the past few years:

• • $11.6 Billion in R&D Expenditures were reported on individual and corporate tax returns
  • Manufacturing was actually the largest sector to claim, but only 6,219 of 15,873 Manufacturers actually took the credit (39%)
  • Businesses of $250 Million of sales or more account for 14% of all claims made, but this 14% accounts for 84% of the total credits claimed
  • Companies with less than $50 Million in sales account for 72% of all filers, but this represents only 11% of the credits claimed

R&D Tax Credit overview:

The Research & Development tax credit was created in 1981 as part of the Economic Recovery Act, designed to fuel American Business and innovation. The R&D tax credit can result in a dollar-for-dollar reduction in a company’s Federal Income tax liability. This general business tax credit is under the IRS Code Section 41, “Credit for Increasing Research Activities.”

Here are some other fast facts regarding the R & D Tax Credit:

• • Taxpayers can claim Federal R&D Tax Credits retroactively and receive cash back by filing amended returns for the past three years
  • Approximately 36 states have their own R&D Tax Credit programs to reduce state tax liability
  • Certain companies can utilize the credit against all taxes paid, including the Alternative Minimum Tax (AMT)
  • Incentivizes innovation in the USA by ensuring the retention of highly skilled personnel in the USA
  • Any R&D Tax Credit not used can be carried forward up to 20 years

What is the federal (research and development) R&D tax credit?

The Research & Development tax credit was created in 1981 as part of the Economic Recovery Act, designed to fuel American business and innovation. The R&D tax credit can result in a dollar-for-dollar reduction in a company’s or its shareholder’s Federal income tax liability. This general business tax credit is under the IRS Code Section 41, “Credit for Increasing Research Activities.”

Who qualifies for R&D tax credits?

The phrase “research and development” might call to mind white lab coats and groundbreaking discoveries.  However, this credit can apply to a broad range of business activities and companies of all sizes.  Companies qualify for the R&D tax credit by conducting activities involving the development of new or improved products, processes, software, formulas, inventions or techniques.  The overall project does not need to be completed nor successful for the activities to qualify for the credit.  Many industries typically engage in qualified activities such as:

• • Manufacturing and Fabrication
  • Software
  • Architecture
  • Civil and Structural Engineering
  • MEP Engineering
  • Food & Beverage
  • Agriculture
  • Oil & Gas

   

  How to claim R&D tax credits

   

  The R&D Tax Credit is claimed on federal form 6765 included in a company’s amended or timely filed federal income tax return.

   

  How does the R&D tax credit work?

   

  The R&D tax credit can result in a dollar-for-dollar reduction in a company’s or its shareholder’s federal Income tax liability.  Qualified small businesses may use the credit against their portion of employee social security taxes up to $250,000 each fiscal year.  This payroll tax offset allows qualified small businesses to receive a benefit for their research activities regardless of profitability.
   
  In addition to the federal R&D tax credit, many states provide their own R&D tax incentives.  Most states mirror the federal R&D tax credit in terms of what types of activities qualify and how the credit is calculated.  However, all states’ R&D tax credits only allow expenses incurred for activities that take place in that state to be included in determining the R&D tax credit for that state.

   

  What qualifies as research and development?

   

  Regardless of industry, size, or revenue, any business that performs activities involving the following items qualifies for the R&D tax credit:
   

  • Activities involving the development of new or improved products, processes, software, formulas, inventions or techniques.
  • The activities need be directed towards resolving uncertainty as to the correct design, the company’s capability, or the methodology to use for the new or improved product, process, etc.
  • Addressing this uncertainty must involve a process that included the development and evaluation of alternatives. 

   

  Do R&D tax credits expire?

   

  Any excess R&D tax credits may be carried back one year to offset tax liability and carry forward up to 20 years to offset future tax liability.

   

  How far back can you claim R&D tax credits?

   

  Businesses can claim the R&D credit retroactively by filing amended returns for any open tax years, which in most cases, is three years. The time frame may be longer, however, if the organization recorded net operating loses during that period.

   

  How is the R&D Tax Credit calculated?

   

  The calculation of the R&D tax credit primarily involves determining the qualified expenses incurred by the company.  The category of expenses that may be included in calculation of an R&D tax credit include:

   

  Wages – Wages paid to employees to the extent they were engaged in qualified research, directly supervised qualified research, or directly supported qualified research activities.

   

  Supplies – Tangible materials used in the conduct of qualified activities by an employee.  The cost for the purchase of capital equipment is generally not eligible, however the costs for materials used in the taxpayer’s development of equipment may be an eligible cost.

   

  Contractors – A maximum of 65% of the expenses paid to non-employees for the performance of qualified activities.  

   

  Cloud Computing – Expenses incurred for cloud computing services that are used in the conduct of qualified activities.