If your company is planning to claim the powerful R&D Tax Credit, which can funnel significant savings back into the business, you first need to know what qualified research expenses (QRE) make this claim possible.
To start with, you must determine whether your business performs qualified research activities, that is, whether it fulfills the four-part test to determine if your research and development qualifies for the R&D Tax Credit. To claim the credit, your business must meet all four parts of the test. Only businesses engaged in qualified research activities may claim the credit, but the criteria are broad:
- The research is designed to create new products or processes, or improve upon existing ones with the ultimate goal of boosting performance, function, reliability or quality. This is the easiest of the four test components.
- One of the objectives of the research is to eliminate uncertainty about the development or improvement of a product or process. That is, improvements made primarily to boost the product’s aesthetics or marketability would not qualify.
- Experimentation has been conducted to eliminate alternatives for achieving the goal. That might include modeling, simulation, trial and error, or something else.
- The process of experimentation must rely on hard sciences – biology, chemistry, physics, engineering or computer science.
A wide variety of research qualifies under these criteria, including but not limited to the following:
- Streamlining the manufacturing process
- Developing new prototypes and models
- Developing new software
- Testing new concepts and technology
- Purchasing equipment aimed at improving a process
- Applying for patents
A professional tax expert can help you determine whether and which of your business activities meet the four-part test as qualified business activities. For many businesses in a wide range of industries, a significant percentage of business activities fall into this category.
Once the qualified research activities have been identified, the next step is to determine which expenses related to those activities qualify as research expenses that will serve as the basis for the R&D Tax Credit.
The four types of qualified research expenses are:
- Costs of supplies used to conduct qualified research. This includes only tangible property used in research and not buildings, land or non-tangible expenses like leases, licensing fees and travel.
- Wages and salaries paid to employees performing qualified research. Employees must be directly engaged in qualified research, such as software engineers writing code or engineers testing new systems. Ancillary employees providing administrative or other support services do not qualify. Only those providing direct supervisory services are included. Higher level managers do not qualify.
- Payments to contractors involved in qualified research. (Only 65% of contractor research may be claimed.) This applies only if your business is paying for the research itself, and not the successful development of a product or service.
- Payments to scientific research organizations and educational institutions involved in outside research. (Only 75% of outside scientific research may be claimed.) Such organizations must be tax-exempt and created with the specific purpose of engaging in scientific research.
There are other, more complex exemptions to the QRE determination process, such as data collection, efficiency surveys, pre-production planning and trial runs, all of which require expertise and experience to evaluate.
A professional tax expert with significant experience interpreting IRS code can help you determine which of your business expenses qualify as part of the R&D Tax Credit. This determination is a complex and time-consuming process in which each expense is examined and analyzed for the most airtight tax credit claim.
National Tax Group has years of experience working with hundreds of companies and has saved its clients 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.
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