Does your company need to develop new and innovative products to stay competitive or gain an edge over the competition? If so, then you probably have, or should have, some Research & Development (R&D) in the works. Did you know you may be able to receive tax credits for your R&D efforts?
The United States has one of the best R&D incentive programs in the world. Most major corporations in the U.S. use the R&D tax credits to be more competitive and your company may benefit too. Startups, tech companies, and now medium and small businesses could increase their competitiveness by bundling Federal, State and local R&D tax credits and incentives programs that may lead to higher profitability and company success.
The U.S. R&D Incentive
26 U.S.Code Section 41, entitled “Credit for Increasing Research Activities”, is often referred to as the Federal R&D Tax Credit. Although in existence since 1981, the tax credit only became permanent in December of 2015 . The law provides a tax credit for certain expenditures when made in the pursuit of qualified research activities. The tax credit is 20% or 14% if you choose the alternative simplified credit option, of the increase of qualified research expenditures over 50% of a base research expenditure amount.
Base R&D Expenditure amount (Y1): $100,000
Current Year R&D Expenditure Claim (Y2) $125,000
Increase over 50% of base amount: $75,000
R&D Tax Credit: $15,000
Although R&D tax credits are available for all open taxable years, the credit may also be available for years where the taxable entity was in a Net-Operating-Loss and the taxable year is “closed”.
1. Dollar-for-dollar reduction of taxes owed or paid (As opposed to a deduction that reduces taxable income).
2. Tax Returns can be amended to claim previously unclaimed R&D Tax Credits
3. Tax credit may carry over for up to 20 years.
Qualifying Research Activity is research that:
1. Has the purpose of discovering a new or improved business component that is technological in nature;
2. Constitutes a process of experimentation for new or improved function, performance, reliability, or quality; and
3. Information that is not available to the taxpayer and eliminates uncertainty about capability or method of developing or improving the business component
Qualifying expenses are:
3. Contract Research Expenses
These expenses must be substantiated to be in the pursuit of qualified research.
Some Exclusions May Apply
There are some pertinent exceptions that may limit the availability of claiming the R&D tax credit. Primarily, research completed after commercial production of the product or process is excluded. Second, funded research is excluded from consideration of a qualified expenditure, but contract research expenses where:
(1) a prior agreement is entered into between a taxpayer and third party
(2) who provides qualified research be performed on behalf of the taxpayer, and
(3) the taxpayer bears the expense even if the research is unsuccessful
may be included in the R&D tax credit calculations. The tax credit may still be available in cases of contract research expenses even if the taxpayer does not have full rights to the research results. The IRS also lists 6 other exclusions including: adaptation; duplication; surveys, studies, and research relating to management functions; internal-use software; foreign research; and research for social sciences .
Using tax incentives, such as the R&D tax credit discussed, may increase the profitability of your business. Despite the incentives, many businesses miss this opportunity simply because they do not know the R&D tax credit exist. There could be significant benefits for your company by way of R&D tax credits.
To find out how your company may benefit from R&D tax credits, contact Trombatore Law Firm, LLC for more information.