The R&D tax credit is a tax incentive for U.S. companies to spend more on research and development activities in the U.S. It can be used to reduce income taxes, AMT, and/or FICA taxes owed.
If you are creating a new/improved product - even if that product is just new to your company - this could be a good tax opportunity for you.
Specifically, the credit is available to any U.S. business attempting to develop new/improved products or processes.
Activities must occur in the U.S., and work to eliminate uncertainty, involve experimentation, utilize hard sciences, and have a qualified purpose.
Qualified expenses include wages, supplies, contract research, and computing costs related to the R&D activities. Even costs related to failed research can qualify.
Expenses related to activities that would not qualify include market research, efficiency surveys, management studies or research related to the social sciences, humanities or arts.
There are two methods to calculate the credit: the traditional method, which is 20% of qualified expenses over a base amount, and the Alternative Simplified Credit method, which is 14% of qualified expenses over 50% of the prior 3 years' average. It can be difficult to calculate the base amount under the traditional method, so the Alternative Simplified Credit method is often the more usual calculation.
Claiming the R&D Tax Credit - To claim the credit, businesses must file IRS Form 6765 with their federal income tax return.
Proper documentation and records retention is critical, as the IRS may request evidence to validate that the activities qualified for the credit.
Many states also offer an R&D tax credit against state income taxes. The rules and criteria are similar to the federal credit, but the calculation and percentage of eligible expenses differ by state.
Consulting a tax advisor or accountant to ensure the R&D credit is calculated properly can maximize the tax savings for innovative companies conducting qualified research. With the right documentation and calculation method, the R&D tax credit can yield significant tax savings. If you've got questions, we're here to help. Contact us today!