Business Expenses as Tax Credits: R&D Credit
Clients often approach us looking for tax savings opportunities. One of their most common questions concerns the expenses they can use to claim tax credits.
If you aren’t aware, you can file for a tax reduction based on your research and development expenses, even if you spent the money in the initial loss-making years of your business. This stands true for organizations of any size investing in innovation.
The US offers some of the best R&D incentives in the world. In this article, we’ll take you through the nuances of Research and Development tax credits so that you can get the maximum claim amount when the time comes.
What Are R&D Tax Credits?
R&D tax credits refer to the decrease in a country’s tax liability when it invests in activities related to research and development. These credits aim to incentivize businesses to take risks and invest in innovation and product improvement and can be claimed at state and federal levels.
You claim your credit by filling out the IRS Form 6765, where you support your claim with financial, business, and technical records. It’s essential to have thorough documentation of your projects and their costs, including reasonable estimates where necessary. You’ll need information like:
● Project lists and notes ● Payroll data of individuals involved in the projects ● Expense details
Employee testimony is also required.
Depending on multiple factors, like the size of your business, you receive 6-14% of the expenses as a tax reduction. And you can carry unused credit for a whopping 20 years! Also, there is no minimum spending amount to make a claim, and even loss-making companies can get tax reductions if they qualify.
What Activities Can Get You R&D Tax Credit?
In general, if you’re doing research and investing in creating a product or service new to your business or improving an existing product and service, you can claim R&D credit. Say you buy computers, lab equipment, software, any hardware for prototypes, etc., for your project. Alongside your worker’s wages, these expenses, energy costs, and, if applicable, payments to subj ects of clinical trials and a part of the consultancy fee will be a part of your R&D credit. Note that the research does not have to be successful to qualify.
IRS has a complicated four-part test for R&D to determine if an activity qualifies:
1. Permitted Purpose: The activity or project must create or enhance a business component’s functionality or performance. The purpose and objectives should be clear and defined from the beginning of the project. 2. Technological in Nature: The project and its processes must have solid technological or scientific reasoning backing them up, such as principles of science, engineering, computers, etc. 3. Eliminate Uncertainty: The word ‘research’ implies a question or uncertainty meant to be resolved. Activities that qualify for R&D must aim at making discoveries to mitigate technical uncertainty regarding product development or enhancement. 4. Involve Experimentation: The activity must involve experimentation, where the company analyzes multiple techniques through a systematic trial-and-error approach.
Should You Work With an R&D Consultant?
If it’s your first time claiming your R&D credit, you’ll likely feel stranded. Professional tax consultants can streamline the R&D process for you and make sure you get the following:
1. Maximum Claim Amount: A professional will help you correctly identify all expenses that qualify as research and development spending, ensuring you get the maximum credit. They will also guide you in documenting your R&D processes, so your claims do not get rejected. 2. Time Savings: As tax professionals have the necessary experience and expertise, they’ll take you through the nuance of tax filings faster. In contrast, you will need your time to research and explore the details of the form and your own documents. 3. Compliance: As R&D is a government initiative, businesses must cater to stringent rules and regulations to qualify. Tax professionals and consultants will make sure your company activities are performed and recorded in a compliant manner. Let Trusteer Help with Your R&D Credit Claims!
Documenting the right processes in sufficient detail, filling forms, preparing for audits, and whatnot, are lengthy processes. Getting help from tax and finance professionals for R&D can save you time and money and ensure you get the maximum claim.
Outsourcing the process to a company like Trusteer is especially beneficial for firms that do not yet have the resources to maintain an in-house tax team. Our state-of-the-art technology will help you estimate your R&D credit, and our seasoned tax professionals will ensure the filing and documentation process proceeds smoothly. And we can even help you prepare for the following year’s filings for your future research and development projects, keeping things ready from the get-go.
Contact us today for the best finance, tax, and accounting services out there.