R&D Tubes

Research & Development Tax Credits

A Valuable Tax Credit that Fosters Innovation

BACKGROUND

The Research and Development (R&D) tax credit is a Federal tax incentive that rewards taxpayers for increasing investment in U.S.-based research activities. This credit was first introduced by Congress in 1981 and made permanent on 2015. The R&D tax credit is available to businesses that uncover new, improved or technologically advanced products, processes, principles, methodologies or materials. In addition to “revolutionary” activities, the credit may also be available if the company has performed “evolutionary” activities such as investing time, money and resources toward improving its products and processes. Correctly calculating and properly documenting the R&D tax credit is critical because it can greatly lower taxes and increase cash flow.

HOW IT WORKS

The R&D tax credit is available to taxpayers who incur incremental expenses for Qualified Research Activities (QRAs) conducted within the U.S. While primarily a wage-based credit, the credit is comprised of the following Qualified Research Expenses (QREs):

  • Internal wages paid to employees for qualified services; this includes those individuals directly performing the science as well as those individuals directly supporting and supervising these individuals.
  • Supplies used and consumed in the R&D process.
  • Contract research expenses (when someone other than an employee of the taxpayer performs a QRA on behalf of the taxpayer, regardless of the success of the research).
  • Basic research payments made to qualified educational institutions and various scientific research organizations.

For activities to qualify for the research credit, the taxpayer must show that it meets the following four tests:

  • The activities must rely on a hard science, such as engineering, computer science, biological science or physical science.
  • The activities must relate to the development of new or improved functionality, performance, reliability or quality features of a structure or component of a structure, including product or process designs that a firm develops for its clients.
  • Technological uncertainty must exist at the outset of the activities. Uncertainty exists if the information available at the outset of the project doesn’t establish the capability or methodology for developing or improving the business component, or the appropriate design of the business component.
  • A process of experimentation (e.g. an iterative testing process) must be conducted to eliminate the technological uncertainty. This includes assessing a design through modeling or computational analysis and experimenting with a material’s durability or longevity.

THE VALUE

The R&D tax credit is primarily a wage-based credit, which is worth approximately 6.5% of qualified R&D activities. Thus, a taxpayer with $1M of qualified wages could receive a $65,000 benefit. Many states also offer R&D tax credit that can greatly enhance the value of the study. Further, the credit can often be claimed for prior tax years.

POTENTIAL BENEFICIARIES

The types of businesses that can benefit from an R&D study is far more expansive than what most people expect. Below is a sample of industries:

  • Aerospace & Defense
  • Electronics
  • Architecture & Engineering
  • Food Science
  • Agriculture
  • Manufacturing
  • Automotive
  • Pharmaceuticals
  • Biotechnology & Bioengineering
  • Software Development
  • Chemicals
  • Telecommunications

When the R&D credit was made permanent, it was expanded to allow a larger number of taxpayers that have been unable to take advantage of the credit previously:

  • Small businesses can now take the R&D tax credit against their alternative minimum tax (AMT). The previous AMT restriction prevented qualified companies from utilizing the research credit, but new changes removed that hurdle for any qualified company with less than $50 million in gross receipts.
  • Startup businesses with gross receipts of less than $5 million can now take the R&D tax credit against their payroll taxes (essentially making it a refundable credit for up to five years).

HOW WE CAN HELP

ICS Tax can prepare all necessary documentation to support the credit, calculate the amount of the credit, and draft necessary compliance. In the event of an IRS audit, we can help support your credit.