The U.S. Research and Development (R&D) Tax Credit was created in 1981 as an incentive for businesses to take risks and undergo research activities to develop and improve their products, processes, or software. Through the Economic Recovery Act of 1981, the R&D tax credit offers reimbursement for business activities and resources that were utilized during research.
Navigating and understanding the ins and outs of the R&D tax credit can be complicated, especially with the introduction of new provisions that have altered the legislation over the past 10 years. To help you better understand the R&D tax credit \, we put together the 7 most common questions that we get asked from our clients.
What Qualifies for the R&D Tax Credit?
The R&D tax credit is for taxpayers who design, develop, or improve products, processes, techniques, formulas, or software. It’s calculated on the basis of increases in research activities and expenditures—and as a result, it’s intended to reward companies that pursue innovation with increasing investment.
In order to benefit from R&D, all research activities performed by qualifying companies must be thoroughly documented. Our team of tax-saving experts will create and provide guidance on the needed documentation.
How Do I Claim the R&D Tax Credit?
You can claim the R&D Tax Credit by filing IRS Form 6765 with your income tax return. Before you file, you should consult an accountant who will be able to help you determine which adequate documents you should keep during the year to ensure you qualify.
How is the R&D Tax Credit Calculated?
The R&D tax credit can be calculated in two ways: the regular credit method and the alternative simplified credit method. NTG uses both methods, for any given tax year, to see which yields the larger tax credit.
In the regular credit method, the credit can be calculated by 20% of the company’s current year qualified research expenses (QREs) over a base amount. When calculating these, the base amount must not be less than 50% of the current year’s QREs and the fixed base percentage must not exceed 16%.
How Has the R&D Tax Credit Expanded Over the Years?
First enacted in 1981, the R&D Tax Credit has evolved over time through new legislation, regulations, and judicial precedents that expanded the number of businesses that can benefit from the incentive. Two of the most prominent changes have occurred over the past 20 years. In 2003, the Discovery Rule was removed from the law. This meant that research activities for a new product or process no longer had to be “new to the world”, but instead “new to the taxpayer” – allowing more industries and companies to qualify for the credit. In 2015, the Protecting Americans from Tax Hikes (PATH) Act made the R&D Tax Credit permanent and modified the credit to benefit small and mid-size businesses while also opening up its availability to startups.
How Does the R&D Tax Credit “Startup Provision” Work?
Startups and small businesses may be able to qualify for up to $1.25 million ($250,000 each year for up to five years) of the federal R&D Tax Credit to offset the Federal Insurance Contributions Act (FICA) portion of their annual payroll taxes.
How Did Tax Reform Affect the R&D Tax Credit?
Current tax reforms have made the R&D credit more valuable with decreased tax rates. The credit can now be used to offset AMT. And NOL deductions can only offset 80% of taxable income.
What Are the Potential Benefits of the R&D Tax Credit?
The R&D Tax Credit drives economic growth by encouraging innovation and invention. It can drive profits and help businesses stay ahead of the competition. R&D can help reduce production costs and corporate income tax.
If you are interested in using the R&D Tax Credit, consult with one of our tax experts today to see if you qualify. Get your free assessment of benefits by emailing our professionals or calling our tax team at 561.257.3436.