Research and development (R&D) tax credits are incentives given by the government. The R&D tax credit is created to assist businesses and help them offset their research and development costs.
The R&D tax credits were created in 1981 to spark enthusiasm and encourage research and development in the United States.
Although this program was designed to promote and support research and development, most companies do not apply, or perhaps they have no ample knowledge of the program.
Companies big and small can make their claim as long as they identify with the qualifications.
The term itself can be quite intimidating as it sounds so technical, but the program and its purpose are easy to understand in reality.
It even gets more manageable; the primary key is research and advice.
Benefits of R&D Tax Credits
- Increase cash flow
- Increases the company’s earnings per share
- Increases your return investment
- Reduces the company’s federal and state tax liability
- Reduces effective tax rate
Is Your Company Qualified For R&D Tax Credits?
Most business populations miss the opportunity of enrolling in this program because they are unsure of whether their business qualifies for the program. Well, the only way to find out is through research, of course.
Reading and learning about the program will help business owners know more about the said program. Approaching experts for help can also be beneficial, especially if you have just started a small business but are planning to expand in the future.
The answer is quite simple and actually detached from the high-walled image companies have about this program. Companies that spend money in progressing new products, services, and processes are eligible.
Companies that upgrade and enhance existing products, processes, and services are also qualified. In a general sense, if your company is spending money on innovation, then you are highly eligible. When you apply, you can then create an R&D tax credits claim for you to be able to acquire a cash payment and or a corporation tax reduction.
A practical evaluation of whether your business is qualified is to look back or observe if you have experienced any kind of uncertainty in terms of outcomes during your project’s starting moments. This can only mean that the team involved was oblivious of the success percentage of the said project. Companies that prove they do more than implementing existing technologies are usually eligible to make a claim.
Companies might think they need some sort of a significant achievement to be qualified for R&D tax credits, but the answer is no. A company does not need to be popular because of a scientific breakthrough or doing something revolutionary. This is a mere misunderstanding that happens to blur the lines surrounding eligibility.
Again, company activities do not need to succeed on a specific program to be a step closer to qualification. In fact, they just have to demonstrate their attempt to discover and improve.
The scope for this program is pretty broad. This can be one reason why business owners are confused or still questioning whether businesses in their field are qualified. If you are wondering whether software development activities are allowed and have the chance of being qualified, the answer is yes.
Generally speaking, any company, whether big or small and in any industry that conducts activities mentioned, can benefit. In fact, the industry does not really have an enormous impact on eligibility in a general sense. It is undeniable, though, how manufacturing companies claim the most amount of R&D tax credits.
They usually take up 60 to 70 percent of the total credits claimed. Next in line are information companies with 15 to 20 percent. They are followed by professional, scientific, and technical services that take up to 10 to 15 percent. Next are wholesale and retail companies that claim 5 to 10 percent. Lastly, the financial and insurance companies by 5 percent.
Companies from different fields and industries claim millions of credits each year. These companies include:
- natural resources (e.g., mining, coal, oil, gas)
- services (e.g., health care providers, entertainment companies, administrative organizations and corporations, hospitality sectors)
- agricultural field (e.g., fishing, farming, hunting)
- architecture and construction (e.g., rental homes and buildings, real estate)
- leasing (these include transportation and warehousing.)
Research and development tax credits are not just for the big companies, but small companies can also apply—companies with small R&D departments or even those that do not have an R&D department. A company does not need these specific departments, so small businesses, and companies can pursue an R&D tax credit claim.
Four Steps of Assessment to Determine R&D Tax Credits Eligibility
The Internal Revenue Code (IRC) and Treasury Regulations developed a four-part test and set up criteria to help in checking a company’s eligibility based on the work they do. The majority of companies get to know more about their work as they relate it to this four-part test.
#1 Qualified purpose – As mentioned earlier, an eligible company that does one or some of the following.
- Creates improved products, processes, software, formulas, and techniques
- Provides an upgrade to existing products, methods, software, procedures, and techniques
- Designs tools
- Integrating new equipment and improving a system
- Manufactures new products
- Develops prototypes, creating models
- Develops simulators
There are probably still a lot of improvements a company can do and venture on, so the “qualifications” are not limited to the list above. The world pertaining to this field is vast.
#2 Eliminating uncertainties – A company should be determined to get rid of the uncertainties as they go on in their innovating journey. As innovation aims to eliminate the gaps in what manufactured materials can do, the company should have the same vision and is open to uncertainties and at the same time committed to removing these gaps.
#3 Process of experimentation – To achieve the desired change, a company should engage in simulation, modeling, systematic trial and error, and other methods available.
#4 Technological in nature – In any way, the experiments and methods should all be based on hard science.