The research and development tax credit is a powerful tool for U.S. business owners looking to innovate, develop technology, and remain competitive in today’s dynamic global marketplaces. It’s often assumed that only large enterprises can leverage this lucrative dollar-for-dollar tax incentive. Fortunately, this is not the case.
R&D Tax Credit Designed for Businesses of Every Size
The R&D tax credits are uniquely designed to ensure qualifying small and medium-sized enterprises (SMEs) have access to this incentive. The R&D tax credit program offers several benefits to businesses, especially SMEs, including:
Boosting Cash Flow
The credit provides a direct reduction in tax liability, leading to increased cash flow that can be reinvested in innovation and expansion.
Encouraging Innovation
By rewarding businesses for investing in R&D, the credit fosters a culture of innovation, leading to new product development and improved processes.
Supporting Competitiveness
Utilizing R&D tax credits allows businesses to lower costs, which can be used to offer competitive pricing or invest in cutting-edge technologies.
Still, many smaller businesses often miss out on claiming these credits due to misinformation about what qualifies as an eligible research and development expense.
Understanding how businesses, regardless of size, can effectively claim the R&D credit can help ensure your company doesn’t miss out on a potential cash infusion come tax time.
Understanding Eligibility Criteria for R&D Tax Credits
The first step towards claiming R&D tax credits is understanding the eligibility criteria. The research activities that qualify for the credit must meet the following criteria of a four-part test:
Serve a Permitted Purpose
The research or activity must be intended to develop a new or improved business component.
Address Technological Uncertainty
The research or activities performed must attempt to eliminate identified technical uncertainties. It’s important to note that these uncertainties must relate to the taxpayer's capability, the method, or the appropriate design of the business component and must be identified at the beginning of the project.
Include a Process of Experimentation
The company claiming the credit must demonstrate that it engaged in a systematic process of experimentation to achieve the desired outcome. Some examples may include modeling, simulation, prototyping, and/or testing.
Technological in Nature
The process of experimentation must be based on hard sciences such as engineering, computer science, biology, chemistry, or physics.
Navigating the Complexities of Qualified Research Expenses
As a general overview, eligible expenses for the tax credit include wages for qualified employees directly involved in R&D activities, including first line supervision and support, supplies used during the R&D process, and certain contract research expenses.
However, determining which activities and expenses qualify for R&D tax credits can be complex, particularly for businesses with limited experience in claiming these incentives. Many companies fail to claim the credit due to the lack of awareness or the misconception that their R&D initiatives don't align with the eligibility criteria. To avoid missing out on these valuable tax benefits, businesses can take the following steps:
Seek Professional Assistance From Qualified R&D Tax Credit Accountants
The first step to successfully navigate claiming the R&D tax credit is to partner with a skilled and experienced firm. Collaborate with tax professionals, accountants, or specialized R&D tax credit consultants who can accurately assess your R&D activities and determine eligibility — and ensure nothing gets overlooked during the claim process.
Document Research and Development Activities
Like any tax program, providing proper documentation is crucial when claiming the credit, as well as during an audit. Maintain detailed records of all R&D activities, including project plans, technical documentation, employee time logs, and financial records as they occur.
Identify Qualified Employees
Clearly identify and track the time spent by qualified employees on R&D projects to accurately calculate the wage-related credit.
Review Historical Data
Even if your company didn't claim R&D credits in the past, review previous projects and expenses to identify potential opportunities for retroactive claims.
Download Acena Consulting’s Free R&D Tax Calculator
Not sure how much your business can save with the R&D tax credit? Download our free online calculator designed to help you do the math of this tax incentive. Schedule a call with an R&D tax specialist at Acena Consulting today!
