The Research and Development Tax Credit or more known as R&D Tax Credit is a tax credit that all businesses can avail of to minimize their state and federal tax liabilities. It was specifically designed to provide incentives to businesses that have a strong R&D program and are always finding ways to develop and improve processes to drive growth and development. The tax credit can be availed of by all kinds of businesses and varying sizes, so whether a startup or a thriving small to medium enterprise can qualify for the tax credit as long as they meet the four-part test used to identify R&D activities and expenses. It is surprising though that not many people or business owners know about these R&D tax credits as a valuable resource, some people believed that R&D would refer to those working only in laboratories or with chemicals, computers, and machines.
This is far from the truth as R&D can very well be the day-to-day activities that the company engages in as part of their standard operating procedures, some people just do not have the knowledge and information on how to apply for R&D tax credits. The R&D tax credit was designed to provide tax relief and savings for US-based research and development activities. More and more companies each year are discovering that R&D tax credits can help them grow their company even more.
Moreover, the Protecting American from Tax Hikes Act or PATH has made R&D tax credits permanent and has made this available even to business startups. Thus, this tax credit can benefit all kinds of businesses and even all sizes. Without a doubt, there is much to be gained in applying for R&D tax credits, however, it would seem that most businesses are not familiar with it and have very limited information on how to go about it.
How Do You Qualify For R&D Tax Credits?
Since not many businesses know about the R&D Tax Credits and how to avail of it, then it also is a given that most do not know if they qualify for the credit or not. Surprisingly, most companies qualify for the tax credit, they just do not know that they do. It would seem that many companies are paying large amounts of money for state and federal taxes when they should not have, this translates to missed opportunities to save on taxes which admittedly are exorbitantly high. To qualify for the tax credit, companies and businesses should provide proof of their qualified innovation activities that drives the business for more growth and development. Most people would think that R&D tax credits were only applicable to those who create the best new products and those that wear laboratory coats, this is grossly wrong though.
R&D tax credits are far-reaching and more expansive than most people think they would be. R&D activities can range from developing and improving processes, products, and services to developing technology, programs, and software. This is particularly important as the guidelines for tax credits in the software and technology industry have become less strict and discriminative, so that more and more companies are realizing the benefits of applying for R&D tax credits. So, whether if your business involved manufacturing, software, engineering, financial services, and many more. If your company regularly engages in activities that promote the improvement and enhancement of your products and operating procedures to become relevant and drive growth, then your company qualifies for the R&D tax credits since most research and development activities are the same activities that companies engage in to drive growth.
How To Claim the R&D Tax Credits?
The most important step in claiming R&D tax credits would be to understand fully the rules for qualifying for the tax credit. This is why a feasibility analysis is an essential component of the process in claiming R&D tax credits. In the feasibility analysis, the company’s research and development activities are identified and explored and the corresponding qualified research expenses are also taken into account. All of this information is then used as the basis for estimating the federal and state R&D tax credits applicable to the company. Having the correct knowledge regarding what can be identified as qualified activities and research expenses will lead to a more accurate estimate of the credits due to the company.
Research and development activity expenses vary from company to company and from varying enterprises and businesses, but the most usual and easily identifiable are employee compensation, materials, and contracted services. When making a credit claim, there should be sufficient documentation to support the said qualified expenses such as payroll records, financial records, supply or contract research expenses, and vendor invoices. This ensures that companies will be able to successfully file their tax credit claims. On the other hand, companies may expect about 7-10% of their qualified expenses to be written off as federal R&D tax credit. This credit can then be deducted from the overall federal tax liabilities of the company. Thus, resulting in cash savings which can be used as additional operating funds.
Defining Federal and State R&D Tax Credits
In this fast-paced world, where everything seems to change after a minute or two, businesses also have to keep up with it. So that, if one wants to stay competitive and have the upper hand in your market niche, then you need to continuously develop and improve your products, processes, system, and software and engage in other R&D activities. This would make research and development the driving force among many businesses. The federal R&D tax credit will significantly lower the past, current, and future years’ federal tax liabilities, which would in turn result in cash savings which can then be used for more activities and expenses. State R&D tax credits will help the company rise above the challenges and be able to keep track of the qualified activities and expenses to be written of as a tax credit. There are many ways in which federal and state R&D tax credits can be availed off, one simply has to ensure that such activities and expenses are identified.
