December 15, 2021

Eric Kelly

The platform to help you claim your R&D tax credits

There are some tax benefits businesses can take advantage of in order to offset their tax losses, such as the business meals deduction. In comparison, only 1 out of 20 small-to-medium-sized companies take advantage of the Research and Development (R&D) tax credit. Recent changes in the R&D tax credit laws have increased the number of businesses applying for it, too. For instance, your company may qualify for the tax incentive if you work on improving products and processes. To help determine how much tax credit you deserve, you can try using a platform such as GOAT Tax.

R&D Tax Credit: A History

The R&D tax credit was introduced in 1981, and it continued to be a temporary law over the next 35 years, regularly expiring (often for up to a year) then being retroactively extended by Congress. The PATH (Protecting Americans from Tax Hikes) Act of 2015 made the R&D Tax Credit permanent.

The PATH Act also included a startup provision as well as an Alternative Minimum Tax (AMT) turnoff feature. In the past, startup companies were unable to use the R&D tax credit because they were not paying federal income tax—they had no tax liability to cancel the credit. The new provisions for startups enable startup companies to take the R&D credit against payroll taxes. The AMT turnoff feature is a major change, because it gives small businesses with less than $50 million in average gross receipt for the previous 3 years the ability to take advantage of the R&D tax credit.

Initially the R&D Tax credit was only allowed on originally filed returns. For most small and medium business owners, qualifying for the R&D tax credit for one year didn’t seem worth it. Regulations were passed in 2014 allowing the R&D tax credit to be claimed on amended returns. Business owners will now be able to change or amend the last 3-4 years of open tax returns.

Misunderstandings

Roughly 80% of the current R&D tax credits go to several of the largest companies in the USA. But, companies of any size qualify for the R&D tax credit and many small-to-medium-sized businesses are missing out. Why? The reason for this is mostly due to self-censoring. Self-censoring presents the biggest roadblock that prevents businesses from taking the R&D tax credit. Many companies simply do not believe they qualify for the credit because they think it is only applicable to companies with employees that work in laboratories—those that dress up in white lab coats and work with test tubes. Business owners usually consider their efforts to make new or more innovative products as simply “doing their job”, when in reality, they are performing R&D qualifying activities.

R&D Qualifying Activities: What are They?

Companies that create, develop, or improve products, processes, formulas, techniques, inventions, or software may qualify for the R&D tax credit. Although the credit isn’t exclusive to a particular industry, some of the most common industries that qualify are Engineering, Architecture, Manufacturing, Construction, and Software/Technology. If a company qualifies for the credit, then more often than not, all R&D expenditures concerning the development or improvement of a product can be subtracted, except for certain activities such as advertising expenses or quality control.

R&D TAX CREDIT FOUR-PART TEST

The R&D tax credit is one of the biggest annual tax incentives granted to U.S. companies, and yet many do not apply for fear that they won’t qualify. This kind of mindset is so yesterday. In the last four decades, lawmakers and regulators have done enough to remove qualification barriers, thereby allowing companies and more industries to qualify or the credit. But how does a company qualify and what is involved in claiming the credit. The GOAT Tax platform has got it all covered right here in this article. Let’s take a look.

THE FOUR-PART TEST

For companies that qualify, being granted the R&D credit simply shows that it is being rewarded for doing business as usual. Qualifying activities may involve creating new or improving products, patents, software, and intellectual property, with qualifying expenses covering things such as supplies, employee salaries, and also contract research.

To qualify for the tax incentive, the activities must satisfy these four criteria:

1. The activity must involve attempts to create or develop a new product, software, process, invention, formula, or technique that increases quality, function, performance, or reliability in some way. The best part of this is there is no need for the activity to succeed for the company to qualify for the credit—it just needs to attempt it.

2. It must be based on a hard science, which means the process of research and development must be based in biology, chemistry, physics, engineering, computer science or must be technological in nature.

3. The activity must attempt to eliminate doubt. For instance, you’re not certain whether a new machine or device can actually make your production process faster. Test it during that stage to find out. Of course, the activity must go beyond just aesthetic improvements and be related to developing methods, design, techniques, inventions, and formulas. Do note that the rule is to “attempt” to eliminate doubt or uncertainty. There’s no need to succeed in this goal, but at least show that you tried to find out.

4. The activity involves experimentation to remove or solve technical uncertainties, meaning you must show that you tried different solutions—simulation, modelling, systematic trial and error, or other ways—to create or improve your product or process.

Documentation is Important

According to the most recent data from the IRS, in 2014, over 17, 824 companies claimed $12 billion in federal R&D tax credits. But for most companies, qualifying for the tax incentive isn’t the challenging part to claiming R&D tax credits, it’s documenting that they qualify is. So, if your company qualifies for an R&D tax credit, you need to keep track of the details from the get-go.

The GOAT tax platform can help you set up your documentation-retention policies and engaging your tax employees. In addition, they provide assistance in project analysis and quantitative information such as expenses, receipts, gross, and revenue information. Having all these on-hand when the time comes to submit your claim will help make the claiming process run smoothly.