This blog was originally published to JBowmanAccountant.org.
The Research and Development Tax Credit benefits almost any business, no matter the size, age, or industry. Since 1981, this incentive has offered reimbursement for innovative and highly-technical businesses. Here are four things you should know about the R&D Tax Credit.
It is available for many industries
From aerospace organizations to wineries and vineyards, several industries can reap the benefits of an R&D Tax Credit. Organizations within these industries must pass a four-part test to affirm that their research activities qualify for an R&D Tax Credit. The four parts of the test are:
- Technological in Nature – “Activities must fundamentally rely on the principles of physical or biological science, engineering, or computer science.”
- Permitted Purpose – “Activities must be performed in an attempt to improve performance, reliability, or quality of a new or existing business component.”
- Eliminate Uncertainty – “Activities intended to discover information that could eliminate technical uncertainty concerning the development or improvement of a product.”
- Experimentation – “All of the activities must include a process of experimentation including testing, modeling, simulating, systematic trial and error.”
It covers a variety of expenses
With all of the activity that goes on in a given business, it can be difficult to track your direct and indirect R&D expenses. However, taking note of those expenses is essential for receiving the appropriate tax benefits. As a rule, the major expenses that qualify are salaries and supplies and materials. For salaries, employees who work in R&D or directly manage those in R&D are covered. Supplies and materials covers anything from nails to computers.
It offers unique benefits to smaller companies
If your small company has gross receipts for five years or less that average less than $5 million, your company may be eligible for an R&D Tax Credit. This is the case even if your company does not owe any taxes, and the covered amount can reach up to $250,000 of a payroll offset. If your small business does not have credit for offsetting payroll taxes in a given quarter, you can carry that credit into a different quarter. However, to do this, you must not exceed the $250,000 limit.
It undergoes regular updates
The R&D Tax Credit does not behave exactly as it did over a quarter of a century ago. As industries and economies evolve, the R&D Tax Credit does, too. In particular, the removal of the Discovery Rule in 2003 redefined research activities as those that would be “new to the taxpayer” rather than “new to the world.” More recently, the Protecting American from Tax Hikes (PATH) Act ensured that small, mid-size, and startup businesses could benefit from R&D Tax Credits.
John J. Bowman, Jr. is an accountant and tax professional based out of Pittsburgh, Pennsylvania. Follow him on Twitter for more blog updates!