How much time and money does your business spend figuring out how to do something new or something better?
We talk to businesses all the time who don’t know their activities could qualify for the federal research and development (R&D) tax credit. Meeting the requirements of the credit takes effort and planning, but a business that commits to a disciplined approach can achieve substantial tax savings, especially once it has a process in place for correctly tracking qualifying expenses.
Whittaker & Company has developed a more in-depth introduction to the R&D tax credit, which you can download here.
Why should you care about the R&D tax credit?
Businesses typically miss out on the R&D tax credit. Many simply don’t know their activities qualify, because they don’t think of themselves or their industry as research-oriented. But the credit is designed to benefit many types of businesses. Industrial firms that constantly retool their facilities for custom jobs, software firms developing new applications, and even professional services firms working on better processes can use the R&D credit to capture tax benefits—provided they plan ahead.
Complexity is another reason businesses don’t pursue the R&D tax credit. Capturing the credit is not just a matter of adjusting the way a business’s accounting records express certain expenses or filling out a short form at tax time. Qualifying for the credit involves careful documentation over the course of a project, which means advanced planning is often needed to get the most from the credit.
The reason to take an interest in the R&D tax credit is simple: it allows a business to claim major categories of expenses as credits that can be used to offset taxable income. The credit captures wages paid to employees and supervisors working on qualified activities. It can also capture consultant fees, supplies, and computing costs. By channeling all of these expenses through a properly conducted process, a business can realize significant tax savings.
What activity qualifies for the R&D tax credit?
The R&D tax credit is available for businesses that pursue activities that meet the requirements of four tests:
- The Uncertainty Test. At the start of the project the outcome must be unknown.
- The Hard Sciences Test. The process must fundamentally rely on the principles of science or engineering.
- The Business Components Test. The activity’s costs must be associated with an identified part of the company’s trade or business.
- The Process of Experimentation Test. One or more alternatives must be evaluated to achieve a desired result and eliminate uncertainty.
The taxpayer must carefully document how its activities meet each of these tests. Tax professionals use the IRS Audit Technique Guide to track the details auditors look for. Ideally, a business follows the requirements from the start of every new R&D activity, with a genuine paper trail of management memos, corporate minutes, and research plans at one end and an analysis of outcomes at the other.
Whittaker & Company encourages every business to take a look at the R&D tax credit as a potential source of savings. In our experience, the benefits of the credit grow as a business adjusts its processes to align with IRS requirements. It’s a process worth starting early, though it’s never too late to explore.
Do you want to find out if your business could qualify for the R&D tax credit? Give Whittaker & Company a call today to schedule a conversation with one of our professionals.