R&D Tax Credits

Save hundreds of thousands of dollars annually in state and federal taxes—if you  (1) devote time and resources to creating new or innovative products, improve existing products, develop processes, patents, prototypes, or software & (2) hire designers, software programmers,  engineers, or scientists.

R&D Tax Credits

For years privately owned pass through businesses have ignored this credit because it was typically not productive. But Tax Reform eliminated the personal AMT tax making R&D credit a valuable but overlooked resource. In some states, you can save additional tax on state income tax.

If your business creates new products for resale or improves your own products, you qualify for the R&D tax credit.  Examples include making them lighter, faster, durable, reliable, prettier, precise or less expensive.

Expense Deduction

Costs related to R&D may be eligible to be expensed immediately—even those costs not eligible for the R&D credit. Expenses incurred for software development, equipment used in your business, or other similar expenses are generally capitalized and depreciated over a specified period of time. If eligible as a qualified R&D expense, such costs can be immediately deducted, therefore reducing your overall tax liability in the current year.

Your organization could be eligible for the R&D tax credit if it:

    • Devotes time and resources to creating new or innovative products
    • Improves existing products
    • Develops processes, patents, prototypes, or software
    • Hires designers, engineers, computer programmers or scientists

Additional Tax Savings Opportunities

Payroll Tax
Companies may be able to apply the federal R&D tax credit against payroll tax if they’ve never had gross receipts or have only had gross receipts within the last five years; and if they also have less than $5 million in gross receipts in the current year.

The Four-Part Test

To be eligible for the credit, your R&D activities must meet each of the following IRS criteria, known as the four-part test:

    • Uncertainty. You must demonstrate that you’ve attempted to eliminate uncertainty about the development or improvement of a product of process.
    • Process of experimentation. You must demonstrate—through modeling, simulation, systematic trial and error, or other method—that you’ve evaluated alternatives for achieving the desired result.
    • Technological in nature. The process of experimentation must rely on the hard sciences, such as engineering, physics, chemistry, biology, or computer science.
    • Qualified purpose. The purpose of the research must be to create a new or improved product or process that results in increased performance, function, reliability, or quality.

Which Expenses Qualify?

Many do, including W-2 taxable wages for employees offering direct support and supervision of research, supplies used in research, and certain subcontractor expenses (provided the subcontractor’s tasks would qualify if they were instead being performed by an employee).

R&D tax credits can also be retroactive. Depending on when your tax return was filed, you may be able to claim R&D credits for three prior open tax years. Several other special situations may enable you to take R&D tax credits even further.

Usability Analysis

Rules govern how much credit you can realize in a current year, carry back to prior years, and carry forward to subsequent years. We can help you work within those rules and identify a beneficial credit allocation depending on your company’s specific facts and circumstances.

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