R&D Tax Credits
For businesses in multiple industries looking to reduce Federal and State tax liability.
r&d
What is the Research and Development Tax Credit?
The R&D tax credit, also known as the Research and Development tax credit, was created as a way to incentivize US-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.ย
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.
Industry Leaders
Benefits
Claiming the R&D tax credit can potentially result in significant cost savings. The benefits include:
How to Claim R&D Tax Credit
The activities that qualify for the R&Dย tax credit are the same ones driving growth in your business.
Four Part Test
Documentation is extremely importantย to defending any R&D tax credit claims.ย
Benefits
Claiming the R&D tax credit can potentially result in significant cost savings. The benefits include:
Increasing Cash Flow
Federal and State Dollar-for-Dollar Income Tax Reduction
Claim Credits for Open Tax Years Going Back 3-4 Years
Reducing Your Tax Rate
How To Claim the R&D Tax Credit
A taxpayer can claim an R&D tax credit, on either their timely filed tax return including extensions for a given year or a taxpayer can go and amend prior returns to claim the credit. For amended tax returns, this can typically be claimed for the previous 3 years.ย
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).
Eligible Industries
More Info
- Aerospace
- Tool & Die
- Metal Fabrication
- Plastics/Injection Molding
- Consumer Products
- Manufacturing
- Architecture & Engineering
- Food & Beverage
- Financial Services
- Mortgage & Banking
- Construction/MEP
- Software Development
- Chemical
- Contract Manufacturing
- Pharma
- Oil and Gas
- Blockchain Development
- Game Development
Qualifying Expenditures for the Tax Credit
More Info
- Salary & Wages
- Supply Costs
- Computer Rental or Lease
Qualified Research Activities
More Info
- Design and development of new or improved software applications
- Development of conceptual designs and defining requirements and specifications for new or improved products
- Development of tooling, fixtures, and dies
- Building and testing prototypes
- Development of production processes and equipment
- Evaluation and testing of new materials for product development
Differentiating Time Between Qualifying and Non-Qualifying Expenditures When Designing a Building
More Info
At Source Advisors, we typically rely on accounting data or time data to understand the research taking place, which is summarized by employee, project, and specific activities being performed. If the time is broken down into tasks, we can look to see if that specific activity qualifies by looking back on the construction stages. Through analyzing the time tracking data, we are able to help identify the main tasks where R&D is taking place and determine a reasonable percentage of time applied toward any specific employeeโs wages.
Alternative Minimum Tax Liability
More Info
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.ย So for tax years beginning after December 31, 2015, there is no limitation.
Case Study: Construction & Engineering
More Info
LEED or green initiatives are big qualifiers for R&D tax credits, as is modular design or spatial design to optimize the use of space in a building.
Case Study: Contract Manufacturing
More Info
A contract manufacturing company that specializes in the design of highly innovative and customized production processes for medical instruments has been claiming R&D credits for the past decade. The company is able to claim a total combined federal and state tax credits of nearly $145,000 annually.
Four Part Test
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.
Calculating the R&D Tax Credit
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 preferential calculation method each year.ย
Both methods offer specific advantages and disadvantages. Our team at Source Advisors can determine the best calculation method based on your specific situation.ย
There are four sections of IRS Form 6765 that must be evaluated:
Section A
The first section is for any business attempting to claim the R&D credit using the RC method.
Section B
This section is for businesses electing to utilize the ASC calculation method.ย
Section C
This section contains further documentation based on your specific business setup.
Section D
This section is required for any small business that falls under the payroll tax election.
SEE IF YOUR STATE OFFERS
R&D TAX CREDIT
CLICK ON ANY STATE TO KNOW MORE
Click on any state to know more
What Is ยง174 R&E Amortization?
ยง 174 of the U.S. Tax Code defines the treatment of Research & Experimental (R&E) expenditures. This section was made a part of the Internal Revenue Code (IRC) in 1954 and allowed for the deduction or amortization of direct and indirect R&E expenditures including:
- Add in Direct costs!
- Occupancy costs: Rent for office spaces or Research facilities
- Equipment rental costs
- Overhead utility costs (heat, light, telephone bills etc.)
- Facilities costs and depreciation
- Travel expenditures incurred for R&E purposes
- Dues and publication expenses incurred for R&E purposes
- Attorney & filing fees for a patent application
Source advisors assists taxpayers in identifying departments and cost center where ยง174 R&E activities are taking place.
Our Enhanced R&D Tax Credit studies include ยง174 study to ensure compliance and to help reduce tax liability.
Take Advantage of the R&D Tax Credit with Source Advisors
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 companyโs federal R&D tax credit opportunity and also determine any state R&D tax credit availability.ย Most states offer R&D tax credits as well with many of them being more lucrative than the federal credit. 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.
FAQ’s
Can the RD Tax Credit Carry Forward?
Yes, if a credit cannot be utilized in the year it is created, the taxpayer must carry back the credit to the prior year and any unused credit is then carried forward for up to 20 years.
Are there Size Requirements or Industry Requirements with the R&D Tax Credit?
No, there are no size requirements or industry requirements associated with the R&D tax credit.ย All size companies in any industry have the potential for an R&D tax credit.
What is the R&D Payroll Tax Credit?
Certain start-up companies are able to use the R&D tax credit to offset company payroll tax.ย A start-up company is defined as a โqualified businessโ that requires having less than $5M in annual sales and no more than 5 years of historical sales among other qualifiers. For new companies performing qualified research up to $250,000 of research credit can be applied against FICA payroll tax and for 2022 and forward another $250,000 can be applied toward medicare tax. This assists many younger companies, most of whom have yet to reach profitability, take advantage of the R&D tax credit.ย
Qualifying Research Activities
- Creating improved products, processes, formulas, software, and techniques
- Automating or improving internal manufacturing processes
- Designing tools, jigs, fixtures, and molds
- Integrating new equipment
- Development of data centers, big data, and data mining tools
- Integration of APIs and other technologies
- Development of financial or pricing models
- Hiring outside consultants to perform any of the listed activities
- Manufacturing new or improved products
- Developing prototypes, first articles, models
- Evaluation of alternative materials
- Development of firmware
- Network hardware and software development and optimization
- Developing simulators
- Development of risk management systems
Qualifying Expenses Include
- Employees or sub-consultants performing research
- Raw materials
- Consumable supplies during development
- Cloud computing services related to development operations
A start up business can also qualify to offset payroll taxes if each of the following criteria is met:
- 5 years or less in revenue
- Less than $5 million in revenue in the current yearย
- Conducted qualifying research activities and expenditures
What are Non-Qualifying Activities?
The below activities do not qualify for the R&D tax credit:
- Market and consumer research
- Research relating to style, taste, cosmetic, or seasonal design
- Management studies and efficiency surveys
- Accounting tasks (e.g. bookkeeping, A/R, A/P, payroll)
- Customer service support
- Giving or receiving training
- Recruiting employees (e.g., hiring engineers, programmers, technicians, etc.)
- Attending industry or professional conferences
TCJA Changes that Could Impact R&D
Changes stemming from the 2017 Tax Cuts & Jobs Act (TCJA) have made the R&D credit even more valuable. One of the changes to the tax code from TCJA was the requirement to amortize all research expenses for tax years starting after January 1, 2022. The belief is that new legislation will be forthcoming and will delay the amortization for at least three years to 2025. ย This is typical in tax law. Many favorable provisions are made temporary due to the budgeting constraints of Congress. So yearly extensions are normal.
It is important to note that the research expenses being addressed by this provision in the TCJA are not the same as those provided for in the R&D tax credit rules. These general research costs are much broader. As such, if the current favorable tax treatment of research expenses expires, companies could see larger tax bills and therefore need the benefits of R&D tax credits even more.