The R&D Tax Credit is a lucrative tax savings device for almost any business investing in research and development, regardless of its size, industry or the scope of its R&D.
Many businesses make the mistake of failing to apply for the credit because they misunderstand what “research and development” means, envisioning scientists in white coats peering through microscopes. But R&D refers to any experimentation to improve products, processes and software.
What Industries Qualify for the R&D Tax Credit?
The R&D tax credit is not industry-specific, but certain industries lend themselves particularly well to the credit because R&D is an integral part of their businesses. The three most prominent categories are manufacturing, technology and health care.
Other industries that exploit the R&D tax credit:
- Environmental & Life Sciences
- Consumer Goods and Electronics
- Aerospace and Defense
- Automotive
- Breweries and Distilleries
- Energy Efficiency and Renewable Energy
- Food and Beverage
- Construction
- Architecture and Engineering
How Would a Company Use the R&D Tax Credit?
Imagine a metal fabrication company that invests in research to create prototypes and test new designs so that it can remain competitive with global competition. It might invest in new welding and laser cutting techniques and experiment with lower-cost powder coatings.
A healthcare company might invest in DNA screening technology while refining its sample collection, laboratory processes and AI-driven data analysis.
Benefits of the R&D Tax Credit
The manufacturing company can offset a portion of its payroll taxes by claiming the R&D tax credit, freeing up cash flow to reinvest in further innovation, equipment, and workforce training.
The healthcare company could free up capital with the credit to fund additional clinical trials, technology advancements, and product development. This would allow it to compete globally and bring to market new life-saving healthcare.
What Expenses Qualify for the R&D Tax Credit?
Businesses of any type that engage in research and development can exploit the federal government’s desire to fuel innovation by offsetting these costs:
- The cost of supplies used to conduct qualified research including costs to rent or lease computers and payments for cloud computing. It does not include real estate expenditures.
- Employee compensation for those directly engaged in qualified research, such as software engineers writing code or engineers testing new systems and those providing direct supervisory services.
- Payments to outside individuals and firms involved in qualified research if the taxpaying business pays for the research and not the results. (65% of contractor research may be claimed.)
- Payments to educational institutions and tax-exempt scientific research organizations involved in outside research. (75% of outside scientific research may be claimed.)
How Much is the R&D Tax Credit Worth?
The R&D tax credit is better than a tax deduction: it offsets tax liability dollar for dollar. It can be carried back one year or forward for up to 20 years if the credit is greater than current year tax liability. Most states provide a further credit, boosting the potential benefit of the credit to 10-20% of qualified spending. The cash flow boost is irreplaceable for many companies.
Furthermore, the R&D tax credit may be claimed by startups that have not yet produced profits or even revenue to offset up to $500,000 of their federal payroll tax liabilities.
Understanding the credit’s complex provisions and shifting enforcement requires expertise and experience, the kind offered by National Tax Group. NTG has saved hundreds of companies millions of dollars through the R&D Tax Credits. Contact us for a free, no-risk assessment to establish the value of moving forward with a claim.
Documentation for the R&D Tax Credit
The IRS values clear and detailed records to support the R&D tax credit claim, something beyond a general accounting ledger reference to “research and development.” The simplest way to achieve that is to collect records as they occur, and create a clear nexus between those expenses and accepted research activities.
Maintain detailed payroll records, equipment and computer purchases, along with leases and contractor costs, and track how they correspond with qualified research activities. Project lists and notes, lab results, even emails about R&D projects are relevant. Support that documentation with detailed notes explaining the R&D activities and expenses.
Most companies need help navigating the QRAs, QREs, documentation requirements, meandering R&D tax regulations and requisite form filings to avoid an audit, and worse yet, an adverse ruling. National Tax Group has helped hundreds of clients save millions of dollars with a 100% record of withstanding IRS scrutiny. Reach out now for a no-obligation consultation to determine whether your business could benefit from the R&D tax credit.
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