Denis Doulgeropoulos
Your Financial Professional & Insurance Agent
Is Your Business Eligible for the Research and Development Tax Credit?
Has your business encountered and solved technological challenges in recent years? Maybe you invested in software development, re-engineered manufacturing processes, or performed laboratory testing. If so, your business may be eligible for the federal research and development (R&D) tax credit. This credit may be available to U.S. businesses that spent money to develop new products or improve the performance, functionality, reliability, or quality of existing products or trade processes — whether the work was done by employees or a third-party contractor.
Understanding the R&D Tax Credit
Section 41 of the Internal Revenue Code defines the rules for the Research and Development (R&D) tax credit. Furthermore, the Protecting Americans from Tax Hikes (PATH) Act of 2015 made this credit permanent and expanded eligibility to include many small and midsize businesses.
How the R&D Tax Credit Works
In most cases, the R&D tax credit is nonrefundable and allows taxpayers to reduce their federal tax liability. Typically, companies can apply about 6% to 8% of their annual qualifying R&D expenses against their federal taxes. Consequently, this credit can produce meaningful savings for businesses that invest in innovation.
If the available credit exceeds the current year’s tax liability, you can carry the unused portion forward for up to 20 years. Moreover, in certain situations, the credit may offset the alternative minimum tax. Additionally, qualifying new businesses may apply up to $250,000 of the R&D tax credit toward their payroll tax liability, providing valuable cash-flow relief.
Estimated Savings from the R&D Tax Credit in 2020
Four-Part Test for the R&D Tax Credit
The Internal Revenue Service determines eligibility for the R&D tax credit by applying a four-part test. Consequently, only qualified research expenses that exceed a defined base amount may generate a credit.
Elimination of Uncertainty
The research must aim to eliminate uncertainty related to developing or improving a product or process. Therefore, the activity should address questions about capability, method, or design at the outset.
Process of Experimentation
The research must involve a process of experimentation. Specifically, this includes systematic trial-and-error, modeling, simulation, or other evaluative methods used to resolve technical uncertainties.
Technological in Nature
The research must rely on principles of hard sciences such as engineering, physics, or chemistry. Additionally, qualifying activities may involve life sciences, biological sciences, or computer sciences.
Qualified Purpose
The activity must seek to create a new or improved product or process. As a result, the outcome should enhance functionality, quality, reliability, or performance of a business component.
Finally, a tax professional can help determine whether your business meets these requirements and qualifies for this valuable tax benefit. Moreover, if you claim the R&D tax credit, you should be prepared to document and substantiate all qualifying research activities.
This information is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek guidance from an independent tax or legal professional. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Broadridge Advisor Solutions. © 2021 Broadridge Financial Solutions, Inc.