It has been possible to get a federal tax deduction for qualifying R&D expenses going back as far as 1981. The Research and Experimentation (R&E) tax credit was introduced as a two-year law at that time and was renewed over the years until 2015 when it was made permanent. It more commonly called the Research and Development Tax Credit and in its most recent form covers a wider range of R&D activities, especially for small businesses and startups. When considering if you can deduct research and development costs, it is best to seek advice from folks who deal with this issue on a routine basis. In the Kansas City area, Exigo Business Solutions has had extensive experience dealing with R&D and the Research and Development Tax credit over the years and is up to date on the recent changes in the law. Here is a short snapshot of R&D cost tax deductions. For a more detailed explanation and help obtaining an R&D tax credit for your business, contact us at Exigo Business Solutions.
First of all, you need to be doing real research and development that qualifies under IRS rules. For example, research in the social sciences does not quality or do ordinary data collection, surveys or studies in relation to management functions, or routine testing and quality control.
Where you can deduct research and development costs on your taxes is when you are doing research in the basic sciences. The basic requirement is that the research is being done to evaluate alternatives in order to “reduce technological uncertainty.” That uncertainty must exist at the start of the project and the R&D must be designed to help resolve that uncertainty. The end target can be to improve a component of your business or the design of that component and can be related to the methodology or capability needed to make the desired improvements.
Wages and supplies directly related to the research efforts may be deductible and monies paid to a third party that carries out the research may be deductible up to 65% of costs and monies paid to a qualified educational institution that carries out the research may be deductible up to 75% of the cost.
The work involved must be related to the hard sciences such as biological science, physical science, engineering, or computer science. Work in the computer sciences for software development must pass several tests. It must involve significant economic risk and not be to develop programs that could simply be purchased. It must also be innovative and meant to result in significant cost reductions, improvements in efficiency, and if economic significance to your business.
If your company has research and development activities in the USA and you are not currently deducting research and development costs on your taxes, contact us at Exigo Business Solutions in the Kansas City area. We will review your situation and help with filing for the deduction as soon as is reasonably possible.