RESEARCH & DEVELOPMENT
TAX CREDIT
Background
The Research and Development (R&D) Tax Credit is a unique and lucrative tax incentive. It helps to reduce current and future years of state and federal tax liabilities, resulting in a dollar-for-dollar offset on both state and federal income taxes based on R&D W-2 wages, R&D Supplies, and R&D Contractor Expenses.
The credit offers an instant source of cash for small to medium-sized businesses and can be applied to all open tax years (3 years back federal) as well as the current tax year. It was implemented to target taxpayers that design, develop, or improve products, processes, techniques, formulas, or software.
The R&D tax credit is calculated on the basis of increases in research activities and expenditures, and as a result, is intended to reward companies that pursue innovation with increasing investment. In addition to the federal R&D Tax Credit, many states also offer their own R&D Tax Credit benefits.
CREDIT IMPACT
incentAdvise has over 20 years of experience helping companies across industries secure valuable R&D Tax Credits. Our team guides businesses through the process of identifying qualifying activities, preparing documentation, and maximizing their claims. Just as important, we show how these savings can be reinvested to fuel growth, innovation, and efficiency. Below are case studies highlighting how our clients put their credits to work and how your business could benefit too.
TOTAL CREDIT
$432,798
GROSS RECEIPTS:
$20, 594,368
GROSS PAYROLL:
$3,398,182
CONSTRUCTION
With the funds from their R&D Tax Credit, our construction client invested in equipment to detect underground utility lines and expand services.
$321,891
TOTAL CREDIT
GROSS RECEIPTS:
$10,957,358
GROSS PAYROLL:
$4,962,753
ENGINEERING
As a startup, this client prioritized employees first. Leveraging the extra funds from the credit, they was able to purchase a 3D printer for quicker prototyping.
TOTAL CREDIT
$107,293
GROSS RECEIPTS:
$5,849,663
GROSS PAYROLL:
$1,307,505
MANUFACTURING
While many clients utilize R&D Tax Credits to make new purchases, our small business client was able to implement a significant quarterly bonus system for their employees.
TOTAL CREDIT
$321,891
GROSS RECEIPTS:
$10,957,358
GROSS PAYROLL:
$4,962,753
SOFTWARE
Established in their industry, our software client used R&D Tax Credit savings to launch a broad marketing campaign, reaching more customers and driving growth.
When claiming the credit in a study, incentAdvise must identify and substantiate a company's Qualified Research Activities (QRAs) and
Qualified Research expenditures (QREs).
Qualified research is an activity* or project undertaken by a taxpayer that meets the Four-Part Test ascribed by the Internal Revenue Service...
*Most activities must only be evolutionary to a company, not to the industry as a whole, to be considered true "R&D" as defined by the Internal Revenue Code.
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You must create a new product, process technique, formula, invention, patent or software, or improve an existing one.
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You must improve performance, functionality, quality, reliability, or cost.
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The process of experimentation must rely on the hard sciences, such as engineering, physics, chemistry, biology, or computer science.
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You must demonstrate that you have attempted to eliminate uncertainty about the development of improvement of a product or process.
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You must demonstrate- through modeling, simulation, systematic trial and error, or other methods- that you've evaluated alternatives for achieving the desired result.
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QUALIFIED RESEARCH EXPENSES
The Three Core
Qualified Research Expenditures (QREs)
Wages
W-2 wages paid to an employee for "qualified services" performed by the employee.*
Only wages subject to withholding.
Outside Contractors
Work performed by non-employee / independent contractors. *
Only 65% of expenses may be eligible.
*IRS section 41b
Supplies
A taxpayer may claim the research credit for amounts it paid or incurred for supplies used in the conduct of qualified research.*
FREQUENTLY ASKED QUESTIONS
Research and Development (R&D) is a unique tax credit. It helps to reduce current and future years of state and federal tax liabilities. It is a dollar-for-dollar offset for both state and federal income taxes. The credit offers an instance source of cash for the small to mid-cap businesses. Businesses can apply the credit for all open tax years and the current year.
Many industries qualify for the credit, including:
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Engineering (Aerospace, Architecture, Defense Contracting, Engineering, and Telecommunications).
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Environmental & Life Sciences (Agriculture/Farming, Medical Devices, Pharmaceuticals, Recycling, and Waste
Management).
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Manufacturing & Design (Apparel/Textiles, Brewing, Consumer Foods & Beverages, Distillery,
Foundry/Metal/Mining, etc.).
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Software (Internet Applications, IT/Software Development, Startups and Website Advertising/Marketing).
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The intent of the credit is to encourage companies within the U.S. to keep technical talent within the country while simultaneously continuing to drive innovation. This keeps not only your company, but the country, competitive both domestically and internationally.
With the changes throughout the years to the qualification rules, more companies than ever before can now take advantage of the R&D Tax Credit. Essentially, the credit is designed to be a driver of innovation and improvement of processes. R&D Tax Credit eligibility is much broader than many companies realize, applying to not only the development of products, but also activities and operations, such as new manufacturing processes, environmental improvements, software development, and quality enhancements.
Absolutely! Since the changes in legislation and tax reform, the R&D Tax Credit remains one of the most valuable incentives offered by the U.S. government for businesses to remain competitive. It’s essentially free money that you’re entitled to.
Even though the credit has been around since 1981, the credit has gradually evolved over the years, with many companies not even able to take advantage of the incentive until the changes that were made in 2015. Due to its gradual evolution over the years, many CPAs may not be up-to-date on the most recent policies and regulations regarding the credit. We currently partner with CPA firms throughout the United States to assist them in providing this service for their clients.