Republican tax cuts have arrived to businesses in recent months, making finances just a little bit easier. Changes to tax codes give a lot more companies the opportunity to immediately subtract capital expenditures from their taxable income.
This can be used for:
- Building renovations.
- The purchase of equipment.
- Other Research or Design expenses.
The change has gotten many industry analysts expecting:
- Great returns on investments with regards to automation systems.
- New industrial materials which will help companies.
- And the possibility for expected wage increases.
What are R&D Tax credits?
R&D Tax Credits are incentives given to businesses by the federal government. The purpose is to give organizations an edge to become more globally competitive in sectors of both science and technology. R&D operates much like a rewards system for companies that are involved in innovation.
Research and development also plays a crucial role in the promotion of the innovation sector at large. Simply put, research is an investment in technology which is used to improve services, products and processes. The system works by helping SMEs (small and medium-sized enterprises) with tax breaks. It also reduces the amount of tax liability on profits which translates into lower corporate taxes.
For startups, it may be hard to calculate research and development costs. For instance, businesses that use the accrual method tend to look at R&D as an expense, while a company contracted to carry out R&D might treat it as an operational cost. Does R&D exclusively apply to companies involved in innovation and development? Not necessarily. Companies that invest in growth and research can treat such costs as expenses for related activities that contribute to their long term advancement.
Why should companies care about R&D tax relief?
Most companies that could benefit from R&D tax credits don’t always act on it because they don’t know how to claim such benefits. Sometimes activities and programs that qualify for research and development go unrewarded because of the companies unfamiliarity with policies and regulations. The good thing is that most SMEs can now benefit from the systematic advantage of R&D tax credits.
The billions that go unclaimed every year due to lack of information can help businesses achieve new success in a lot of different areas. One of the biggest advantages is in the form of payroll taxes leading to refund checks from the IRS. Simply put, your projects will qualify for tax relief if they are creating innovation in the field of science and technology and uncertain
outcomes. All projects that qualify will contribute to specified fields in the form of new services, processes or products.
Important questions businesses should ask themselves to learn if they qualify for substantial tax benefits:
- Has your business developed any new software, product or processes?
- Has your company upgraded any current product, software or processes?
- Has your company ever tried to improve current processes, products or services?
There are other qualifications apart from the above that a company must meet to be considered for the R&D tax credit.
Here is a list of what does NOT qualify for R&D:
- Studies or surveys.
- Research funded by an individual or a government entity.
- Research carried out outside of the United States.
- Research in arts, social sciences, and humanities.
Innovation continues to play a key role in business competitiveness. Those who know how to take advantage of R&D can use it to increase their cash flow and grow their profit margins. There are a few defining parameters about qualified research objectives that will help businesses grow.
Qualified research is the attempt to develop a new business aspect or improve existing aspects as it relates to:
A business aspect can also take any of the following shapes or forms:
- A process.
- an intervention.
- a software.
To qualify, a business aspect must be intended for lease, sale or license to be used by the taxpayer in the course of their businesses. On the other hand, qualified research can also be regarded as a part of an experiment. Having a business aspect or component alone is not enough.
There are three other important requirments to be met:
- All activities involved in developing a new product or service must contain elements of experimentation.
- The method of a business component must be uncertain at the beginning of the experimentation process.
- The process must heavily depend on technological developments.
What kinds of businesses are eligible for R&D tax relief?
To qualify for R&D tax relief, a business must do a project that shows work geared towards innovation and advancement in areas of science and technology. Companies can use any of these three schemes to claim R&D depending on the size of their companies:
- SME scheme.
- Large company scheme.
- R&D expenditure credits came into effect from April 2016.
All qualifying projects have to show how they can improve existing products, processes or services. Their innovation must revolve around any aspect of technological or scientific uncertainty. The project must also be related to trade carried out by your business or one that you intended to be carried out due to R&D.
For instance, an eligible project can be a business that builds IT software to run a new management system. Such a company or business can make R&D claims based on the revenue expenditure, materials used, utilities employed, and wages for those working on the project and the software required. This cost would be deducted from the accounted profits in such mentioned areas. Therefore, they would be liable for reduced corporation taxes on the
This would be subtracted from their accounted earnings in multiple specific areas, and they would only be liable for Corporation Tax on the remaining amount.
How to make a claim
It is in your best interest to get professional advice before claiming HMRC. National Tax Group will help you to explore all opportunities available so that you can get a good deal. We can help look for R&D tax solutions for you based on substantial experience in this sector. The first task is to know which scheme to claim your R&D tax claims; SME or large company. SMEs can also
make claims under large corporation’s plans under exceptional circumstances.
National Tax Group can help give a detailed technical description to show why your projects qualify for R&D tax credits. The report will state that you are creating innovation in the field of science and technology under a climate of technological and scientific uncertainty. An HMRC inspector will
review your claims to ascertain if indeed you qualify for a tax credit. Get ahead in your business and the industry at large with R&D tax credits!