As presented during one of our Lunch and Learns, a recently issued government regulation qualifies more industries to claim the R&D Tax Credit. This credit is aimed at industries with R&D efforts performed by employees within the United States (US). The purpose of this tax credit is to encourage innovation and job growth inside the US. (See October 2014 Tax Credits for Government Contractors, under Training, Lunch and Learns)
What is a tax credit?
It is a dollar-for-dollar reduction in taxes, which makes a credit more valuable than a tax deduction.
What type of research qualifies for R&D tax credits?
Efforts using technology to develop a new product or to improve an existing one can qualify for the R&D credit. The term “product” includes not only tangible products sold to customers but also intangible products, inventions, designs, and manufacturing processes.
What if I am a service-based government contractor? What type of activities may qualify?
The most common qualifying activity by far for a service-based government contractor is software development. This includes not only developing new software but also making improvements to existing software.
What expenses qualify for the credit?
Eligible expenses are wages paid to employees involved in qualifying activities, supplies, and the 65 percent of amounts paid to contractors.
How much is the R&D credit?
The R&D credit is an incentive for companies to increase their level of research relative to prior years, so the calculation depends on the amount of research done in the credit year compared with the past. Therefore, the benefit varies by company, but it can be as high as 9 percent of qualifying research. The credit is available against regular tax but not alternative minimum tax; however, any unused credits can be carried back one year and forward 20 years.
What if my company is a pass-through entity?
The owners of a pass-through entity, such as an S corporation, partnership, or LLC, pay the tax on the income of the business. The R&D credit is likewise passed through to the owners of the business to offset their personal taxes.
Myths and Facts:
• Myth – Only large corporations who own laboratories can claim this credit.
• Fact – This tax credit is for companies of all sizes and all business types.
• Myth – If you missed the opportunity to claim the R&D Tax Credit, you can never claim it.
• Fact – There is a three (3) year Statute of Limitation. You can “look back” up to 3 years for unclaimed R&D credits.
Things to consider:
• Do not confuse R&D with Independent Research and Development (IR&D). R&D is contract specific efforts (required by the statement of work). While IR&D efforts: a) benefit the entire company, b) are charged as general and administrative expenses, c) are for basic and applied research, development, and systems and other concept formulation studies.
• You can claim the R&D Tax Credit on fixed and Time and Material (T&M) type contracts.
• You can identify qualifying activities by contract as long as you develop and retain adequate documentation.
Is it possible that you are passing up on tax credits/incentives due to hassle and regulatory complexity?
Look no further, we are here to help! Contact your WatkinsMeegan Account Executive and the alliantgroup tax advisory team today to learn more about R&D qualifying expenses and how you could potentially claim R&D credits.