March 31, 2020

How to Claim the Federal R&D Tax Credit

Small Business
By: Ronald B. Allen

Does your company do research and development? If so, you may qualify for a tax credit to offset expenses. Federal law has provided tax credits for qualifying R&D since 1981. What was initially a two-year incentive (Research and Experimentation tax credit) was repeatedly renewed and finally made permanent in 2015. In fact, in 2015 the now-permanent law made it easier for small businesses and startups to qualify. If you wonder how to claim the federal R&D tax credit, here is a thumbnail sketch of the steps involved. If you believe that you may qualify and want to know more about R&D and the Research and Development Tax Credit, contact Exigo Business Solutions in the Kansas City area for expert advice.

How to Claim the Federal R&D Tax Credit

In order to receive tax credits for R&D, it must take place in the USA and satisfy a simple set of criteria as defined by the IRS. If you have USA-based R&D operations, find out if your work qualifies. Then you need to document those expenses using small or medium-sized business accounting software such as QuickBooks. It is best to deal with someone experienced with this part of the tax law. You do not want to claim tax credits for a type of work that does not qualify or specific expenses that will be refused. If at any point you are confused about what to do, feel free to contact us in the Kansas City area at Exigo Business Solutions.

Does Your R&D Qualify for a Tax Credit?

The R&D tax credit is meant for work in the hard sciences as opposed to the social sciences or things like customer surveys. And, the work must be done in order to “resolve technological uncertainty” that preexists the project. This uncertainty should have to do with a methodology or capability meant to improve or develop a component of the business or the design of such a component.

In regular English this means that your company needs to have a technological problem it is trying to fix or a technological goal it is trying to achieve. The means of doing this is unclear and the work being done is meant to resolve the issue.

This work may have to do with new products or processes or ways to improve existing products or processes. Inventions, formulas, defined techniques or processes, and even computer software for internal use may qualify. (There are more rules in regard to computer software.)

What Costs Qualify for Credits?

Both wages paid to employees and supplies may qualify for tax credits. The wages need to have been paid specifically for qualified R&D work and should match the wages declared for withholding of federal income taxes. For supplies to qualify, they need to have been consumed or used specifically for the R&D work for which you are claiming credits. (Land, land improvements, and any property that you can depreciate do not qualify.)

If you pay someone else to do the R&D you can still claim part of the expense. If you contract with a third party to do the work and they keep careful track of the expenses, you can receive a tax credit for 65% of the costs they generate and pass on to you.

If you pay for R&D by an educational institution or scientific organization that qualifies you may receive a tax credit for 75% of the cost.

The Details of Claiming the Federal R&D Tax Credit

The R&D tax credit can be a great benefit to your business. But, you need to know the details because if you do not file your tax return in such a way as to get the maximum benefit for you, the IRS will not step up and remind you of what you missed!

For example, when congress made the tax credit permanent in 2015 the law now allows businesses to apply the R&D to reduce their alternative minimum tax liability for years 2016 and forward. The alternative minimum was an obstacle to claiming this credit for many companies for years. Also, the now-changed law allows a startup with gross receipts of $5 million or less and without any tax liability to use the R&D tax credit to reduce their payroll taxes ($250,000 cap, up to five years).

These details of the federal R&D tax credit, and more, are why you should deal with an expert such as Exigo Business Solutions in the Kansas City area for how to claim the federal R&D tax credit. Feel free to contact us at any time.

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