R&D Tax Credit
The Internal Revenue Code is quite complex and “taxing”.
Corporate and personal federal income taxes are still high after recent tax cuts and aren’t expected to be decreased any time soon. The results of your hard work and determination are being taken away – what can be done to limit income taxes and keep more cash flow in your pockets?
A Research and Development (R&D) tax credit study is an effective tax reduction tool for companies engaged in qualified Research and Development activities. Benefits include:
- Reduced income taxes and increased after-tax cash flow on an annual basis.
- A possibility of filing amended tax returns to claim R&D tax credits not previously taken for all open tax years.
- Establishing a methodology to use for future R&D tax credit calculations.
- Documentation of credit calculation for support in event of audit.
Many businesses don’t realize they are eligible
Most companies who design or manufacture a product, including software, perform research and development activities continuously to improve their products or production methods. There probably aren’t any white lab coats involved, and you may not call the activity research, but most of your product and process improvement activities probably qualify you for a tax credit!
- Federal non-refundable credits typically 7-10% of qualified expenses
- Partners and shareholders of pass-through entities may now apply these credits against the AMT tax
Start-up businesses: Did you know?
- Certain start-up companies are eligible to offset the credit against employer FICA tax liabilities. This is a great way to conserve cash at this critical stage in building your business.
What Type of Activities Qualify as Research & Development?
Activities undertaken to obtain information useful in the development of a new product or process, that is based upon a physical or biological science, including computer science, and that involve a process of experimentation, modelling, or “trial and error,” to resolve an uncertainty regarding the design of the new product or process.
Common Examples Include:
- Development of prototypes or pilot models (including computer generated)
- Automation of a previously manual manufacturing process
- Testing of new materials for manufacturability and other applications
- Development or improvement upon chemical formulas
- Design and development of products used in manufacturing process
- Incorporation of new equipment and redesign manufacturing processes
- Software development up to a “beta” version
What Expenses Qualify?
- Wages of employees performing or supervising research
- Materials directly used in the research process including costs of prototypes & pilot models
- 65% of subcontract research expenses
What Industries typically have R&D that Qualifies for Tax Credits?
These industries are great candidates to qualify for R&D tax credits:
- Computer Hardware
- Chemical Manufacturing
- Food & Beverage Manufacturing
- Breweries & Wineries
- Life Sciences
- Medical Manufacturing and Pharmaceuticals
How Can Davie Kaplan Help You?
The Research and Development tax credit is a complex and constantly changing benefit in the tax code. Claims for this credit have always been subject to more IRS scrutiny – especially when filing refund claims for prior year overpaid income taxes. (Recently, the IRS issued stringent new requirements for documentation of R&D refund claims on amended returns.) As a result, the computation of the tax credit requires a comprehensive understanding of Internal Revenue Code Section 41, and decades of related case law, and an ability to convert the technical know-how into an end result that is favorable for the client and defensible upon audit.
Davie Kaplan has tax professionals with the experience and specialized skills necessary for the Research and Development tax credit computations.
More importantly, our tax advisors can translate a complicated matter into a clear conclusion in a common-sense manner and provide clarity for you, the business owner or financial professional.
We welcome the opportunity to serve you in your tax minimization efforts. Please contact us and we can help determine if you perform activities that may qualify for the Federal Research and Development program.