What is the Research Tax Credit?
Formally known as the Research and Experimentation Tax Credit, the research tax credit, or R&D credit, is a tax incentive given to companies who are in the business of making products that are lighter, faster, more durable, less expensive, more reliable or more precise.
Who Qualifies for a Research Tax Credit?
More companies that you would think qualify for the R&D Tax Credit. Companies in the business of product development, including manufacturing processes, software development, environmental improvements and quality enhancements of almost any type of product can qualify. Also, companies that invest significant resources to design and build parts, equipment or infrastructure according to customer specifications. In many cases, if a risk of loss exists relating to the designs, these costs may qualify for the credit as well.
How do I know if my company qualifies?
You may be eligible for the R&D credit if your company engages in any of the following activities:
- Devotes time and resources to creating new of innovative products
- Improves existing products
- Develops processes, patents, prototypes or software
- Hires designers or engineers
What kinds of companies qualify for the R&D credit?
- Aerospace and defense
- Life sciences, including pharmaceuticals and medical devices
- Construction and engineering
- Food service and processing
- Chemicals and plastics
- Many others (retail, financial, oil and gas, telecom, automotive, etc.)
Why Choose Veracity?
Because Research Tax Credits can be a highly lucrative tax strategy, the IRS applies extra scrutiny to companies who take advantage of the credit. Due to this extra scrutiny, the qualitative and quantitative aspects of a Research Tax Credit claim must be well documented and follow tax law. Veracity’s R&D professionals are industry specialists who have years of experience in performing these studies. Veracity’s leaders and staff have the depth of knowledge and expertise required to perform the complex tasks associated with a proper R&D study and the tax expertise to help you maximize the benefits.
Frequently Asked Questions
While many CPAs understand the basics behind the Research and Experimentation Tax Credits, it takes a professional who works in this field on a daily basis to truly understand all the rules and complexities that govern the R&D Credit, both at the Federal and state levels. We will actively partner with your CPA to ensure proper use and maximization of your R&D Credits.
To qualify for the Research and Experimentation Tax Credit, your R&D expenses must meet each of the following criteria:
- Process of Experimentation
- Technological in Nature
- Qualified Purpose
Payroll, which includes Box 2, W-2 wages for all employees directly involved in the research, including supervisory and support staff. Supplies consumed in the process also figure into the credit. Finally, certain subcontractor expenses can also qualify, provided their activities meet the four-part test and would otherwise qualify if their activities were being performed by an employee.
Perhaps. If you are seeking the R&D Credit for the first time as a company, and you have been performing R&D activities for several years, it may benefit you to calculate your credits for prior tax years to take full advantage of the study.
The cost of an R&D study is based on time and expenses. The more complex the situation, the more time and expense that will be incurred. In general, the benefits of the study are 3-6 times the cost. Fees paid for an R&D study are also tax deductible.