RESEARCH AND DEVELOPMENT TAX CREDIT
We claim Research and Development (R&D tax) credit wide range of our creative industry company returns every year in order to minimize tax owed. Federal Research and Development (R&D) tax credit is a tax credit that can beneficial to start ups, small companies and larger corporations. If done correctly, R&D credit can allow a business to offset up to $250,000 of payroll taxes using R&D credits, up to $1,250,000 over a five-year period.
The Research and Development tax credit is available to companies both big and small- providing that:
· Gross receipts do not exceed $5 million in the taxable credit year
· No gross receipts for any taxable year preceding the 5-taxable year period ending with the taxable credit year
· R&D credits it can use in that year
Do any of your company activities qualify for R&D?
You can generally claim Research and Development Tax Credit if you meat each element of the ‘four-part test’ and do not fall into any of the categories that are excluded.
The purpose of the activity is to improve the functionality, performance, reliability, or quality of a product, process, software, technique, invention or formula (“component”) that is intended to be used in the taxpayer’s business or held for sale, lease or license.
The taxpayer encounters uncertainty regarding whether it can or how it should develop the component, or regarding the component’s appropriate design.
Process of experimentation.
To eliminate the uncertainty, the activities include evaluating alternatives through modelling, simulation, systematic trial and error, or other methods.
Technological in nature.
The success or failure of the evaluative process is determined by the principles of engineering, physics, chemistry, biology, computer science, or similar natural or “hard” science, as opposed to principles of, e.g., economics, consumer preferences.
If your work falls into any of the categories in the list below, you are not able to claim the Research and Development Tax Credit
Conducted outside the U.S.
Relying on the social sciences, arts or humanities
To collect routine data or ordinary testing for quality control of existing components.
Market research; management, consumer preference testing.
“Funded” by an unrelated third party, i.e., for which the taxpayer doesn’t either retain rights to the results of the activity or necessarily have to pay for the activity because an unrelated third party is contractually obligated to pay for it, even if the activity fails to produce the desired result.
To develop or improve software originally intended primarily for the taxpayer’s use. Exceptions exist for this exclusion, and taxpayers have claimed and supported on exam hundreds of millions of dollars related to internal-use software development.
What expenses qualify?
There are a number of expenses that qualify under the R&D tax credit. You must be sure to that you claim items correctly in order to avoid penalties.
Below is a list of expenses that qualify for R&D tax relief:
If you employee staff who perform or directly supervise or support qualified activities, their wages can be claimed under the tax credit
Cost of supplies
The cost of any supplies used in qualified activities can be claimed under the credit. This means any extraordinary utilities, excluding capital items or general administrative supplies.
65%-100% of contract research expenses
65-100% of expenses incurred through contract research for qualified activities can be claimed. This is providing the taxpayer retains substantial rights to the activity’s results and pays the contractor whether it succeeds or fails.
Rental or lease costs of computers
If you have used rental or leased computers during qualified activities, the rental/ lease costs are claimable.
Risks of claiming Research Tax Credit
1. The IRS are able to examine any R&D tax credit claim. This means that if errors of wrongful claims are made, Amended tax returns will have to be filed. There for unnecessary expense and stress.
2. Penalties and interest: If the IRS disallow a credit claim it may consider issuing a penalty if the credit was either claimed through negligence of disregard for rule and regulations set by the IRS.