Frequently Asked Questions About the R&D Tax Credit

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Posted by Randy Eickhoff on Jan 16, 2019 12:09:01 PM

Like most tax credits, the research and development tax credit has undergone several legislative changes and iterations since its inception in 1981. However, in 2015, significant modifications to the R&D tax credit qualifications significantly increased eligibility for companies of every size and in over 40 industries across the U.S. Does your business qualify for this cash-infusing tax benefit? Knowing some of the most frequently asked questions about the research and development tax credit program can help you determine if your company is eligible to take advantage of the Section 41 credit.

My Company Doesn't Invent Anything – Does That Disqualify Us From the Credit?

This is probably the most commonly asked question (and misconception) about the research and development tax credit. Many business owners assume if they don't have scientists in lab coats dedicated to inventing new technologies, their company doesn't qualify. However, the new R&D tax credit legislation was designed to help drive innovation and improvement of existing processes, so even if your business doesn't invent something new, you may still be eligible for deductions.

Is There a Limit on the Amount I Can Claim?

No. There's no maximum amount a company can claim for qualifying expenses.

Can the R&D Tax Credit Be Used to Reduce the Alternative Minimum Tax (AMT)?

Yes, in some cases. The PATH Act of 2015 states that business with less than $50M in annual revenue can offset the alternative minimum tax (AMT).

Can Research and Development Claims Be Made for Prior Years?

Yes. Taxpayers can file an amended claim within three years of the initial filing date. It's important to note that the 280(C) election on the reduced credit cannot be elected on an amended return.

What Is Considered Qualified Research When Computing the Innovation Tax Credit

To qualify for the R&D tax credit, research activity must meet all four tests mandated by the IRS. Eligible activities must serve a qualified purpose, be technological in nature, include a process of experimentation, and eliminate technical uncertainty to be claimed as a research and development activity.

What Business Expenses Qualify for the R&D Tax Credit?

Typically, qualified research expenses (QREs) include employee wages, contracted labor expenses, supplies, and rental of cloud computing space for development and testing purposes.

How Is the Innovation Credit Computed?

Taxpayers may use one of two general methods when computing the R&D tax credit: The Regular Credit Method and the Alternative Simplified Credit. Taxpayers are allowed to choose either of these two methods based on which option yields the best results for their business. It's important to note that both of these computations offer distinct advantages and disadvantages, making it critical to fully understand the differences of each before making a final selection. Additionally, once a taxpayer elects the Alternative Simplified Credit, they must use it going forward.

Is the Research and Development Tax Credit Worth the Time and Effort?

Yes! The 2015 changes in legislation have helped make the research and development tax credit one of the U.S. government's most significant benefits to businesses across multiple industries. Claiming all eligible deductions and credits can offer an invaluable opportunity to generate cash flow for your business.

Tax season is here. Don't navigate through the rules and regulations of the innovation tax credit on your own. Contact Acena Consulting today to discuss potential qualifying activities at your company with one of our research and development tax experts.

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Randy Eickhoff

Randy Eickhoff

Acena Consulting President Randy Eickhoff, licensed CPA, has partnered with more than 200 companies during more than 20 years of experience securing tax credits and other government incentives. His corporate partners range from multinational technology firms to smaller, privately held manufacturing, sports, and technology enterprises.