Research (R&D) Tax Credit
You Take the Risk, You Should Get the Credit
What if you could capture tax credit for the research expenses your business undertakes? The federal research tax credit (also commonly called the Research & Development, or R&D credit) was created as an incentive for companies to take risks and make expenditures for developing new products or processes. In short, this valuable and often overlooked credit may provide significant savings that companies can use to reinvest in their research and development efforts.
Changes to federal tax law in 2015 made this credit more appealing than ever, since it:
- Was made a permanent credit in the Internal Revenue Code as part of the PATH Act
- Can be used to offset AMT tax liability for certain small businesses
- Can be used to offset some payroll tax liabilities for certain startup businesses
Certain states may also offer research credit depending on the expenditure.
Eligible qualified research activities include things like new product development, process improvements, and technical problem solving. The qualifying research expenses used to calculate the credit are primarily either:
- Labor costs of employees or contractors that are involved in R&D activity
- The cost of supplies consumed in the R&D process and/or the development of prototypes
Working with a third-party researcher or contractor? Your business may still be eligible to receive credit. Although the rules for qualifying R&D activities are complex, the first step in determining eligibility is to identify whether or not:
- The activities are technological in nature and involve some technical or scientific aspect (such as engineering)
- The activities are for a new or improved product, business process, software, formula, technique, or invention
- Alternatives for creating a new product or business process are tested and evaluated
Ongoing research activities are also eligible, and even failed attempts at developing a new process or product count.
The research credit is designed to incentivize an increase in research activity and expenses. Therefore, the credit amount can differ based upon many variables, including a company’s history of R&D activity. Startup companies may be eligible for additional credit considerations. Credit results in a dollar-for-dollar offset against tax liability.
The research credit is classified as a general business credit. For corporations, it is used to offset current liability of the corporation. For pass-through entities, it flows through to the partners or shareholders. The credit may only be used to offset the tax liability associated with the income of the trade or business generating the research credit. However, credit that is limited or cannot be claimed in the current tax year may be carried forward (20 years for federal credits).
Additional state research credit may also be available from a number of states.
More than 40 industries have qualifying research expenses, and certain sectors lend themselves to R&D activity more than others. Examples include, but are not limited to:
- Electrical/Mechanical Contracting
- Life Sciences
- Machine Shops
- Medical Device & Equipment
Dedicated Focus, Proven Methodology
There are no guarantees when it comes to research. However, when you partner with KSM, you will benefit from our team’s dedicated focus and proven methodology. We do more than help capture research credit; we make life easier by helping to navigate the complex environment of determining research credit eligibility.
We serve our clients by:
- Determining the types of expenditures that may qualify
- Calculating the credit
- Coordinating the credit with the research deduction
- Helping you assess whether getting the research credit is worth the business risk
- Recovering lost money from unclaimed research credit
- Assessing the fee arrangement of a third-party contractor
- Filing the necessary paperwork
Added Value Beyond Research Credit
Helping companies find and capitalize on research credits represents just one part of an overall business plan. There are many ways our team can help your business maximize cash flow, improve efficiency, and realize its potential. KSM’s Tax Services Group has a well-earned reputation for providing strong and successful advocacy in federal and state tax matters. Additionally, our professionals offer consulting expertise across a wide range of industries and possess the technical expertise and institutional knowledge that is so important to succeeding in today’s business landscape.
Whatever the industry, whatever the challenge, our unrivaled experience, expertise, and proven, personalized approach will ensure your business is able to capitalize in full.
If your company has incurred research and development costs in the U.S., please contact us to see how our experienced team can help determine your research credit eligibility.
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