Over the last year, you may have made a substantial investment in research and development to take your business to the next level. You engineered a new product. You created more advanced version of an existing product. You tested several new procedures. You built and customized new software to better support your production processes.
Did you ever think you might qualify for a special tax credit that recognizes such innovation?
Not only is it possible but much of the “red tape” associated with obtaining this tax credit has been removed.
Referred to as the R&D tax credit, it’s a federal credit that may be worth up to 13.5% for every dollar spent on qualified research. In addition, many states will offer an R&D tax credit against state taxes too.
What’s the tax credit’s real benefit? Potentially huge savings.
Let’s say a company has added a few million dollars in expenses as a result of prototyping a variety of products before arriving at a successful version to bring to market. If it qualifies for the R&D tax credit, that company could see hundreds of thousands of dollars in federal benefits and over $100,000 in state benefits.
Activities that may qualify
To get a sense of the activities we’re speaking of that may qualify a company for the R&D tax credit, here are a variety of good examples:
- Pre-production design & engineering of a new product
- Improving an existing product
- Innovation of processes
- Production improvements
- Patent applications
Testing and experimenting with new concepts, formulas, materials, tools, and procedures
Software development for sale or internal use
General trial and error experimentation
Putting your efforts to the 4-part test
Naturally, it’s not quite enough to have simply engaged in the activities above. However, on a positive note, many of the past requirements to receive the R&D tax credit have been removed. As a result, the general rule is that an expense that qualifies for the R&D tax credit must meet the following four criteria:
- Elimination of Uncertainty
Does it improve a capability, methodology, product or process design?
- Technical in Nature
Does it rely on physical or biological sciences, engineering or computer science?
- Permitted Purpose
Can the expense be tied to an eligible component of your business?
- Involves a Process of Experimentation
Was there a trial-and-error path taken during development?
Based on this 4-part test, you’ll typically see activities such as the following excluded from qualifying for the credit, including:
- Routine inspections and quality control
- General employee training
- Financial data analysis and preparation
- Marketing and advertising
Are there gray areas for qualification? Absolutely.
The question of whether a business qualifies for the R&D tax credit doesn’t always come with an obvious answer. For example, certain software that supports a business’ internal administrative or financial functions may not necessarily qualify for the credit yet we’ve witnessed recent rulings that qualify administrative and financial software when it supports dealings with customers, clients, vendors, banks and other third parties.
Documentation requirements. Complicated tax codes. Plenty at stake. Don’t navigate these waters without BRP.
Considering how much the R&D tax credit could be worth to your business, make sure you turn to the CPAs who have the highly specialized knowledge to guide your company through the qualification process: Bronswick Reicin Pollack. Our people have an intimate understanding of the complexities associated with the R&D tax credit and can advise you on how to properly support a claim if your business qualifies. We can even evaluate expenses from years past that may actually qualify as R&D expenses eligible for the tax credit today. It’s one more way we’re helping our clients maximize their growth and evolution.
Let’s talk more about it at 847.808.9800 or email us at info@BRP-CPAs.com.