The R&D tax credit may be claimed by taxpaying businesses that develop, design, or improve products, processes, formulas, or software. Technology companies are constantly innovating and advancing, making them the perfect match for R&D tax credits. With the increase of technological advances, the number of companies that could benefit from the tax credit is continually increasing.
It’s important to calculate and claim R&D credits correctly, as there are consequences in terms of penalties and fines if done improperly. National Tax Group will break down how technology companies can claim the R&D tax credit.
What is the R&D Tax Credit?
The R&D tax credit was established in the Economic Recovery Tax Act of 1981. The goal of the tax credit is to reduce a company’s tax liability. Therefore, there is no expense or credit limit a company must claim; if they do not use the credit immediately, they are usually able to carry it over to a different year. Additionally, the R&D credit is offered at a federal and state level.
How Much Can a Technology Company Save?
Many factors influence a company’s ability to save money with R&D tax credits. A company’s size and type of tasks allow savings to range from $50,000 to even $5 million. The amount saved does not have to do with a company’s revenue, but their expenses are eligible for credit. In a matter of one year, a company’s credit can make up approximately 5%-15% of its R&D expenses.
What Qualifies for the R&D Credit?
Several activities performed by technology companies may qualify for the R&D tax credit. For example:
- Introducing new technologies
- Designing and testing prototypes and pilot models
- Testing alternative models
- Designing, updating, and selling software platforms
- Enhancing existing products and software
- Creating software
- Creating technologies such as artificial intelligence, augmented reality, or virtual reality
- Developing software applications
- Creating mobile applications, video games, and operating systems
These activities are beneficial for the improvement of the manufacturing process, product performance, and competitive advantage. Due to the experimentality of technology companies, many activities in developing new products and solutions have the potential to qualify for the tax credit.
How Do We Apply for R&D Tax Credits?
Proper documentation is essential for claiming an R&D credit. First, compile all necessary information regarding your company’s potential qualified activities and expenses. From there, you will be able to acquire an estimate of the credit benefit. Next, conduct a financial analysis and gather additional, meticulous records to support the documentation for the credits. Finally, claim the R&D tax credit by filing IRS Form 6765 with your income tax return.
Whether your technology company is a startup, eCommerce, or agtech company, it’s time to claim the R&D tax credit. Collect documentation and records to make the tedious process more seamless. If you have any questions or would like a free assessment, contact National Tax Group today.