“Research & Development Tax Credit: Do you Qualify?” by Mark Lapikas, CPA, MTax, MBA, Senior Manager – Tax
Many business owners are unaware of the research and development (R&D) tax credit which is available to companies that invest resources aimed at producing an improved product or process.
Who Qualifies for the R&D Tax Credit
The R&D tax credit is available to businesses of all sizes that design, develop, or improve a product, process, formula, or technique within the United States. The tax credit was implemented to encourage companies to invest resources to improve their competitive edge and stimulate economic growth.
The Federal R&D tax credit was introduced in the 1980s and was initially thought to apply to businesses that had on-site laboratories or developed breakthrough research. However, more than 20 years after the credit was introduced, Federal regulations were provided to more liberally define qualified expenditures which created a gateway for more businesses to qualify for the tax credit.
What Expenses are Eligible and How is it Calculated
The R&D tax credit is allowed for expenses paid or incurred for research or experimental expenditures which generally include all costs incident to the development or improvement of a product or process. Research and experimental expenditures include both in-house and contract research expenditures for wages paid and supplies used.
The following is a basic example of how the tax credit can work. ABC Company employs an engineer to run a product line and perform product testing at an annual salary of $200,000.
The engineer spends 40 percent of his time with operational matters and 60 percent of his time testing new and improved products. In addition, ABC Company provides the engineer with $80,000 of supplies to perform product testing.
In this case the potential R&D tax credit could be as high as $20,000, which is calculated as 50 percent of the qualified wages and supplies multiplied by a 20 percent R&D tax credit percentage.
New Legislation Extends Eligibility to Small Businesses
In addition, Congress recently enacted the “Protecting Americans from Tax Hikes Act of 2015” (i.e. the 2015 PATH Act) which included a provision making permanent the R&D tax credit.
Another important piece of this legislation is that beginning in 2016 eligible small businesses ($50 million or less in gross receipts) may claim the R&D tax credit against alternative minimum tax (AMT) liability.
An additional component afforded by the 2015 PATH Act is that companies with less than $5 million of gross receipts in the current year can offset a portion of payroll taxes, up to $250,000 a year and $1,250,000 over a five-year period. While many criteria must be met, such as no taxable income in any of the prior five years, this new piece of legislation may offer a large benefit to companies just getting off the ground.
The R&D tax credit is often an overlooked and misunderstood tax incentive. Due to federal regulations clarifying qualified expenditures, qualified activities no longer need to result in new technological breakthroughs. Even the use of technological principals to develop a new or improved product or process for your organization qualifies.
Please don’t hesitate to contact your Apple Growth Partners advisor at 330.867.7350 to see if this potentially lucrative tax incentive can be utilized in the immediate or near future.