RESEARCH & DEVELOPMENT CREDIT (R&D)
The next credit I want to talk about in this series is the Research and Development Credit (R&D).?This credit, like the ERTC that I mentioned in my last article, can also be worth quite a bit of money.?And it is money that a lot of small businesses don’t realize they are leaving on the table.
But what is the R&D Credit? What are some common industries that should consider claiming this credit??What is this credit for and what expenses does it cover??If you’ve ever wondered about this, then keep reading because these are questions I’ll be answering throughout this article.
What is the R&D Credit?
Essentially, the R&D Credit is exactly what it sounds like.?It is a credit available to those companies that devote money and resources to researching and developing new technologies and products. This credit has been around since 2004 and is a permanent credit, so you can claim it every year as long as you qualify for it.?And don’t forget, you can also go back and claim it for past years that you qualified for if you didn’t know about it then.
Although some common industries typically qualify for the credit, your industry doesn’t automatically qualify or disqualify your business from claiming the credit.?What is important is the type of activities your business performed and the type of expenses you made when performing these activities.
Common R&D Credit Industries
Although it doesn’t necessarily matter what industry you are in, some industries tend to qualify for the R&D Credit more often than others.?These are industries like Engineering, Physical and Biological Sciences, and Computer Science.
Engineering refers to the basic types such as civil, structural, or mechanical engineering.?But it also includes other areas like design and construction building, architecture, systems building, and systems integrators. Physical and Biological Sciences is a much broader category.
This industry includes areas such as manufacturing, food and beverage, aerospace, agriculture, electronics, packaging, and life sciences.?Finally, Computer Science includes things like application development, platform development, data migration, system control development, and robotics.
Again, your company does not need to fall under these industries to qualify for the credit.?But, if your company does work in any of these listed industries, it more than likely does qualify for the R&D Credit. ?
Qualified Research Activities
As I said before, qualifying for the R&D Credit depends on what type of activities your company performs.?What’s important here is asking yourself what’s the purpose of my research and development? In other words, what are you trying to accomplish??
To qualify, your research has to pass four basic tests and, unlike the last credit I discussed, it has to pass all of them not just one of them. ?You must ask:
Something important to note is that these tests are simply guidance so you really should talk to a tax professional about your specific case if you want to claim this credit. ??
领英推荐
A new or improved business component means that the purpose of your activity was to improve the function, performance, reliability, or quality of an existing business component.?A business component would be something like a product, process, software, formula, technique, or invention.?Essentially if you meant to make something faster, stronger, or more productive then it likely passes this test.
Elimination of uncertainty means that you spent time looking at an appropriate design, methodology, or capability.?Did you look at how your item could be made, what it would look like, whether it could even be made, whether there was a better way to make it, or whether there was a way to make it better??If so, you likely pass this test as well.
You also need to show some sort of process of experimentation.?This could be lab work, modeling, simulations, design development, prototype development, trial and error methodology, or some other evaluation technique.?The process just needs to show that you looked at one or more alternatives using some process of experimentation.?
Finally, your research activities must be technical in nature.?You just need to rely on principles of technical sciences to discover your information.?These are principles like aeronautics, biology, chemistry, pharmaceuticals, food science, physics, computer science, or engineering.?
Qualified Research Expenses
If you pass all four of those tests, then we can get into which of your expenses you can claim for the credit and how much.?The R&D Credit is one of those rare credits that generally allows a dollar-for-dollar credit.?Meaning if you spent $100 on R&D, you could claim $100 in R&D Credit.?
This varies depending on some circumstances so you may want to talk to a tax professional to help you with this. There are four types of qualified research expenses:
Wages may seem self-explanatory, but it is a little more nuanced than you’d think.?Do we include all wages for the entire company??Are they only the wages of the people doing the research??
What about the supervisors or the support staff, do we include their wages??This can get a little complicated so make sure you talk to a tax professional before you move forward.?But the general rule is, if the employee had anything to do with the research and development activities, then their wages qualify for the credit.
Supplies and materials generally refer to tangible things.?Things like prototypes, raw materials, scrapped or reworked products, and pilot models all count toward this credit.?Again, if they were physical tangible objects used in the tests above, then their purchase price counts towards the credit.
The rules for payment to third-party contractors are generally the same as the rules for wages.?If you pay an independent contractor or a third-party company to do work on the research activities mentioned in the tests, that pay qualifies for the credit.?The rules change depending on the third-party contractor so again, you should probably talk to a tax professional about it.
Finally, if you rent or lease cloud-based storage to house the R&D development information, that also counts towards the credit.?This isn’t a straight dollar-for-dollar credit, but it’s still a credit nonetheless. This one can get pretty complicated so make sure you talk to a tax professional to make sure you don’t over or underclaim this credit. ?
If you are a small business or even a large business, the R&D Credit could be money that you are leaving on the table.?Remember, congress set this money aside specifically to support you as you work towards making all of our lives better.?If you would like to talk to one of our knowledgeable tax attorneys, please feel free to contact us through our website.