Guest Post: Taking Advantage of Research & Development Tax Credits
Section 41 of the U.S. Federal Tax Code provides a nonrefundable tax credit for companies that engage in qualifying research and development (R&D) activities, as long as those activities occur in the United States. Examples of qualifying research expenditure activities for purposes of Section 41 include:
Developing a new or improved technology or product
Creating a new production process, or improving a current one
Developing or improving software, prototypes or other models
Up until recently, the R&D tax credit was only a temporary provision. Prior to 2015, the credit was usually extended at the last minute or after year end and made retroactively, which resulted in many companies and advisers viewing it as somewhat risky to claim. However, in 2015, the R&D tax credit was made a permanent provision.
What is the Benefit of the R&D Tax Credit?
The R&D tax credit can create immediate cash flow for companies by reducing current year tax liability dollar for dollar. The credit can amount to as much as 20% of the excess qualified research expenditures for the tax year over a base amount. Although the credit is nonrefundable, any credit not used in the current year can be carried back one year and carried forward 20 years.
Additional qualifying activities that can be documented in prior years can create additional cash flow in any open tax years, currently three years, by filing an amended tax return.
What Expenditures Can be Included in the R&D Calculation?
The R&D tax credit is calculated as a percentage of the company’s expenses related to qualifying R&D activities. Qualifying R&D expenditures can include operating expenses such as wages paid to employees responsible for qualifying R&D activities, or materials and payments to third party contractors who are performing qualifying R&D related activities for the business.
One of the benefits of the credit is that, while these expenses are fully deductible when determining taxable income, they can also count towards the R&D tax credit.
What Industries Qualify for R&D Tax Credit?
Contrary to common misconceptions, R&D activities do not require scientists or laboratories. Any business that is currently participating in any qualifying R&D activity is eligible to take the R&D tax credit. Some of the industries within which many businesses are eligible include:
Automotive
Architecture/engineering
Food, beverage and craft brewing
Life sciences (medical devices, pharmaceuticals, biotechnology, recycling, agriculture)
Manufacturing
Technology (software or app development, telecommunications, electronics)
Even startups that are not generating taxable profits can take the R&D tax credit against a portion of their employer payroll taxes. This specific type of credit is one of the most beneficial tax credits currently offered and is both a federal and state incentive, with roughly 70% of states offering it.
How Can the BSSF R&D Tax Credit Consulting Practice Help Me?
Companies should not attempt to claim the credit without professional help. The BSSF R&D Tax Credit Consulting Practice has extensive experience helping businesses with all stages for claiming the R&D tax credit, including:
Identify qualifiable R&D activities
Perform the calculations to determine their R&D tax credit claim
Defend their R&D tax credit claim, if needed
If you have questions about the R&D tax credit, contact the BSSF R&D Tax Credit Consulting Practice today!
Disclaimer: Information provided by Brown Schultz Sheridan & Fritz (BSSF) as part of this blog post is intended for reference and information only. As the information is designed solely to provide guidance, and is not intended to be a substitute for someone seeking personalized professional advice based on specific factual situations, responding to such inquiries does NOT create a professional relationship between BSSF and the reader and should not be interpreted as such.
Although BSSF has made every reasonable effort to ensure that the information provided is accurate, BSSF makes no warranties, expressed or implied, on the information provided. The reader accepts the information as is and assumes all responsibility for the use of such information.
About the Author
Matthew S. Fox, CPA, is a Senior Manager with Brown Schultz Sheridan & Fritz (BSSF) and a key member of the Firm’s Tax Department. Matt has over fifteen years of experience providing tax planning and preparations services within a variety of industries including craft beverage, insurance, construction, real estate, manufacturing and financial services. He specializes in Research & Development (R&D) Tax Credit consulting and leads BSSF’s Craft Beverage Practice.
