For businesses in multiple industries
looking to reduce Federal and State tax liability.
The R&D tax credit, also known as the Research and Development tax credit, was created as a way to incentivize U.S. based research and development activity. The Protecting Americans from Tax Hikes (PATH) Act in 2015 made this a permanent tax credit and extended the benefits to startup companies. The credit enables businesses of all sizes to reduce their federal income tax for qualified research expenses. These expenses must be for qualified research activities.
Claiming the R&D tax credit can potentially result in significant cost savings. The benefits include:
A taxpayer can claim an R&D tax credit, on their timely filed tax return including extensions for a given year and a taxpayer can amend prior returns to claim the credit. For amended tax returns, this can typically be claimed for the previous 3 years.
The credit is claimed by filing IRS Form 6765, Credit for Increasing Research Activities (for the year in which the qualified expenses were paid or incurred).
Qualified Research Activities include but are not limited to the following:
The Protecting Americans from Tax Hikes (PATH) Act of 2015 included provisions that allow small and mid-sized taxpayers to offset their Alternative Minimum Tax (AMT) liability with the R&D tax credit for taxable years beginning on or after Jan 1, 2016.
Previously, qualified companies could be limited by AMT and unable to utilize 100% of the R&D tax credit. Instead, any excess credits had to be carried back and then forward. However, the PATH Act makes it possible for small businesses to offset their Alternative Minimum Tax through the R&D tax credit. So for tax years beginning after December 31, 2015, there is no limitation.
Documentation is extremely important to defending any R&D tax credit claims. This includes having a permitted purpose, technological uncertainty, the process of experimentation, and being technological in nature.
There is a Four-Part Test for qualification of the R&D credit as seen below:
There are two methods a taxpayer can choose from when computing the R&D tax credit: The Regular Credit (RC) Method and the Alternative Simplified Credit (ASC) Method. Taxpayers can generally choose the most beneficial calculation method each year.
Both methods offer specific advantages and disadvantages. Our team at Source Advisors can determine the best calculation method based on your specific situation.
There are four sections of IRS Form 6765 that must be evaluated:
The first section is for any business attempting to claim the R&D credit using the RC method.
This section is for businesses electing to utilize the ASC calculation method.
This section contains further documentation based on your specific business setup.
This section is required for any small business that falls under the payroll tax election.
Source advisors assists taxpayers in identifying departments and cost center where Section 174 R&E activities are taking place.
Often our R&D Tax Studies are augmented with 174 Amortization studies to ensure compliance and to help reduce tax liability.
The R&D tax credit can help a wide variety of businesses offset and reduce their income tax liability, in addition to providing many other benefits. At Source Advisors, we can help assess your company’s federal R&D tax credit opportunity and also determine any state R&D tax credit availability. Our team of experienced CPAs, attorneys, engineers, and technology experts helps companies save money and create cash flow with R&D tax credits that can then help drive overall growth.
The Research and Development (R&D) Tax Credit is a business incentive that can be used to reduce a company’s federal income tax liability. It is available to businesses that are engaged in the development of new or improved products, processes, software, techniques, or formulations. To qualify for this credit, taxpayers must have incurred expenses related to qualified research activities.
There are several benefits to claiming the R&D tax credit. These benefits include:
The R&D Tax Credit is claimed by filing it on a timely submitted tax return, which can include extensions. This credit can also be retroactively claimed on amended tax returns, typically for up to the previous three tax years. To report the credit, businesses need to complete IRS Form 6765, titled “Credit for Increasing Research Activities,” for the tax year in which the qualified expenses were incurred. For business entities such as Sub-S Corporations and LLCs, the credit is passed through to the shareholders, who then report it on their individual Schedule K-1 forms.
There is no limitation on the amount of R&D tax credits that can be claimed each year.
The credit is not refundable. Any Research & Development Credit that is not used to offset the taxpayer’s tax liability for the year in which the qualified research expenses were paid or incurred can be carried back one year. The remaining amount can be carried forward for up to twenty years.
Yes, taxpayers can claim credits for prior tax years. They generally have three years from the original filing date to amend their tax returns. In some cases, the period available for amending may extend beyond three years.
Acquisitions or dispositions of trades or businesses must be accounted for when calculating the R&D tax credit, both for the base period and for the current year’s qualified expenditures. Consistency between these periods is mandated by IRC §41(c)(5). For instance, if a company acquires another entity during the current year, the R&D expenses of the acquired entity must be included in the current year’s R&D tax credit calculation. Similarly, the acquired entity’s prior R&D expenses will also need to be factored into the base period calculations.
Yes, a company calculates its R&D tax credit, and this credit is then directly applied against the company’s federal tax liability for the current tax year in which the credit is claimed. Any unused credits can be carried back one year and then carried forward for up to 20 years.
The IRS has outlined a four-part test in the Internal Revenue Code (IRC) §41(d)(1) that taxpayers must apply to each of their business activities or components. To qualify for the R&D tax credit, all four criteria must be met. Additionally, the company conducting the research must assume the financial risk associated with the development and must also hold the rights to the research being performed.
There are two general methods for calculating the Research Tax Credit:
Both of these approaches are included on IRS Form 6765, titled “Credit for Increasing Research Activities.” Taxpayers have the option to choose either method when filing a timely tax return. However, it’s crucial to understand the unique advantages and disadvantages of each approach, especially because once a method is elected, it cannot be changed on an amended return.
The first step is to evaluate your ability to utilize the R&D tax credit. Since the credit is not refundable, you need to be paying taxes to benefit from the R&D tax credit process. Once it is determined there is sufficient tax available for your company to benefit from the credit, it is time to proceed to the next step which includes determining the qualifying research expenditures and estimating your R&D tax credit.
The definition of research for R&D tax credit purposes is quite broad. If you are conducting engineering activities that are new to you as a company and there is risk associated with the success of the outcome, this may qualify as R&D.
Some examples include but are not limited to:
Any company trying to improve what they do, be more competitive, reduce costs or increase market share will likely have qualifying activities.
Many of our clients have this concern at the outset of the project and are surprised at how little disruption the process causes. Generally, your team would spend between 10 to 20 hours, distributed among several individuals, with each person contributing approximately 15 to 45 minutes. Clients who are well-organized and assist us with upfront planning usually find that they spend even less time on the process.
Yes. For 2016 and subsequent tax years, businesses can use their R&D tax credits to offset payroll tax providing they meet the following requirements:
Note: For a company wishing to use its 2017 R&D tax credits to offset its payroll tax in 2018, it could not have had any gross receipts prior to 2013.
You should file at the beginning of the year. At Source Advisors, we can help you file your claim for the R&D Tax credit in a timely manner.
Request an enhanced R&D Tax Credit study that includes a Section 174 study to ensure compliance and to help reduce tax liability
Automate your R&D tax credits with GOAT.tax
We help businesses based in the UK claim R&D Tax Credits