The Benefits of a Research & Development Tax Study
The federal Research & Development (R&D) tax credit is a credit against taxes, meaning you must be profitable to utilize the credit. However, small start-up companies may now be able to claim a credit against their payroll tax even if they pay no income tax. In addition, some state R&D credit programs provide for refundable credits.
In general what now may be referred to as a business development and payroll tax credit, commonly known as R&D tax credit, is a dollar for dollar credit against payroll taxes owed or previously paid. It was expanded by the Protecting Americans from Tax Hikes (PATH) Act, signed into law on December 18, 2015, by President Obama.
The rules of the R&D tax credit can be found under Internal Revenue Code (IRC) section 41 and the related regulations. The R&D tax credit may apply to any taxpayer that incurs expenses for performing Qualified Research Activities (QRA) on U.S. soil.
Its purpose is to reward U.S. companies for increasing their investment in R&D in the current tax year. Any business that attempts to develop new, improved, or technologically advanced products or trade processes can take advantage of the provisions of PATH. The credit may be available to taxpayers that have improved upon the performance, functionality, reliability, or quality of existing products or trade processes, in addition to activities such as creating new products or trade processes.
The PATH Act of 2015 permanently extended the R&D tax credit. Additionally, it also made two very important changes effective for tax years beginning after December 31, 2015. These changes are intended to expand the reach of the credit: (1) the act allows small businesses to take the R&D tax credit against their alternative minimum tax (AMT), and (2) the PATH Act allows startup businesses with no federal tax liability and gross receipts of less than $5 million to take the R&D tax credit against their payroll taxes for tax years beginning after December 31, 2015, thus making it a refundable credit capped at $250,000 for up to five years.
The credit is calculated using either the "regular" or "alternative simplified credit" method. The credit a taxpayer can use in a year is subject to the general business credit net income tax limitation, but the unused portion of the credit can be carried back one year and carried forward 20 years.
The compliance steps for completing the Form 6765 to compute the research credit and the Form 8974 to determine the amount of credit that may reduce the employer's OASDI are neither so cumbersome nor complex as to discourage small businesses from quickly and easily complying. Using an income tax credit against payroll tax is a unique opportunity for frequently cash-strapped small startup businesses
In short, small businesses incurring qualified research expenses that do not currently have an income tax obligation should consider this mostly overlooked planning option. Taking the credit may result in an immediate cash flow increase of the company. The average credit is $25,000 for every $1,000,000 in total company payroll.
How a Research & Business Development Tax Study is Conducted
Our service partners utilize a team of highly qualified professionals including IP Attorneys with engineering backgrounds and adhere to the Comprehensive Project by Project Approach methodology as required by the IRS. By following this methodology, every applicable employee is qualified with activity, hours spent, and corresponding wage paid, in order to maximize the incentive for our clients. Every applicable section of the code is strictly adhered to and first-in-class documentation to substantiate our findings is provided. Contact us at [email protected] to get started.
Businesses that Qualify for Business Development Tax Credits
The R&D tax credit is designed to encourage innovation. As such, it is equally available to companies that attempt evolutionary improvements to existing products or processes as well as companies that undertake revolutionary activities. The development or improvement effort does not have to equate to something completely novel. The regulations define research as activities constituting a process of experimentation “intended to eliminate uncertainty.” with information known to the taxpayer available at the outset of the project.
The R&D tax credit is not just for companies engaged in basic research. The company does not need to be “successful” in its research endeavor and may qualify even if the project fails. It is the process that is reviewable for qualification. Even if the company is not profitable, the credit can be carried forward 20 years. In addition, some state R&D credit programs provide for refundable credits. Most state eligibility requirements mimic federal eligibility requirements. However, some may restrict, include or provide for enhanced credits for specific types of research. The most common differences between federal and state R&D credit computations relate to the credit rate and base amount computations.
Who and what qualify as research and development (R&D) is much broader than most people realize. There are no company size requirements; the credit is only based on engaging in qualified activities. Activities and costs related with developing or improving a product and/or process often qualify for R&D tax credits. Furthermore, engineering, design, testing, and programming are now included as Qualified Research Activities (QRE). Industries that most commonly qualify are:
- Software Developers
- Tool & Die
- Machine Shops
- Plastics Manufacturers
- Food Sciences/Manufacturers
Qualifying Activities for the Business Research & Development Tax Credit
If your company is involved in any of the following activities, you may be able to claim the R&D Tax Credit:
- Developing an innovative product that is new to the market
- Engineering and designing a new product
- Conducting research aimed at discovering new knowledge
- Searching for ways to apply new research findings
- Designing product alternatives
- Evaluating product alternatives
- Introducing significant modifications to the concept or design of a product
- Designing, constructing, and testing pre-production prototypes and models
- Engineering activity to advance the product’s design to the point of manufacture
- Utilizing systems processing modeling
- Conducting system and functional requirements analysis
- Utilizing integration analysis
- Experimenting with new technologies
- Experimenting with new material and integrating the material to improve manufactured products
- Engineering to evaluate new or improved specification/modifications in terms of performance, reliability, quality, and durability
- Developing new production processes during prototyping and pre-production phases
- Conducting research aimed to significantly cut a product’s time-to-market
- Conducting research aimed to obtain more efficient designs
- Developing and modifying research methods / formulations / products
- Paying outside consultants / contractors to do any of the above activities
An initial consultation is done with proprietary business profiling software which will give an estimate of R&D tax credits. After the initial evaluation a discovery call is placed with a Growth Management Group R&D Specialists to identify potential Qualified Research Expenditures (QRE). If qualifications are identified, an authorization page is collected to begin working on the client’s behalf. No fee is charged until credits are identified and utilization is verified with the client’s accounting representation. Contact us at [email protected] to get started.
R&D Tax Credit History
The Research and Development Tax Credit was enacted in 1981 to encourage American investment in innovation. Manufacturers and other technical based operations often qualify for lucrative tax credits based on qualified activities.
The Manufacturing Incentives benefit is a Federal program designed for Companies that perform Manufacturing in the U.S. This program is listed under Section 41 or the IRC (Internal Revenue Code) and continues to be amended on an annual basis as the U.S. Manufacturing landscape continues to evolve. This is an engineered based program that focuses on a company’s operations and processes in order to determine their qualification for incentives. The Manufacturing Incentives benefit provides an avenue to receive tax money back from prior years while also reducing current taxable income on a dollar-for-dollar basis. Call us at 1-888-705-5557 ext. 6513 to get a no-obligation evaluation.