If you own a business or farm, you may be wondering what you can do to reduce your tax burden and pay less of your income to the Internal Revenue Service and your state taxing agency. One potential way to reduce your taxable income is with the Research & Development Tax Credit, which is one of the most under-utilized business tax credits in the US tax code.
What is the R&D Tax Credit?
The Research and Development (R&D) tax credit is officially called the credit for Increased Research & Experimentation (R&E), although the former name is the one the IRS uses. It is a tax credit designed to encourage business owners and corporations to conduct R&D within the United States by providing them with a tax incentive for investing in research and experimentation.
The R&D tax credit was first introduced in 1981 and was initially in place for just two years. The tax credit’s effectiveness and popularity have kept it in the United States tax code ever since. However, despite its popularity, many businesses do not take advantage of the Research and Development Tax Credit and, as a result, end up paying much more in taxes than they need to.
Certain limitations within the R&D credit were addressed in 2015 with the passage of the Protecting Americans from Tax Hikes (PATH) Act, which made some expired tax provisions permanent.
As a Research and Development tax consultant, CMP has invested a lot of time and resources into helping our clients understand and enjoy the benefits of the Research and Development Tax Credit. We have developed a series of materials and resources that our clients can use to help identify activities and products that qualify for the Research and Development Tax Credit, and just as importantly, to track and document in order to prove your eligibility for the credit.
Which Businesses Qualify for the R&D Tax Credit?
Only about one out of every 20 businesses that may qualify for the R&D tax credit claims the credit on their tax returns. Companies in more than 40 industries may qualify, including farming, manufacturing, engineering, computer science, life sciences, and more.
Any business that develops software, products, designs, or other proprietary or unique new technologies, systems, or products should take a serious, in-depth look at their operations to see if they are eligible to take advantage of the R&D credit. The R&D tax credit can help businesses and their owners to save thousands or even millions of dollars in taxes every year.
As R&D tax credit consultants, we have found that many of our clients in the following industries have at least some activities or products that qualify for the R&D Tax Credit:
- Machine Shops/ Tool & Die Makers
- Software Developers
- Providers of Cloud-Based Technology Services
- Biotechnology & Pharmaceutical Companies
- Chemical Laboratories
- Architecture & Engineering Service Providers
- Oil & Gas Exploration
- Telecommunication Companies
- Food processing
- Other Technology Companies
CMP has a system to help teach our clients about how and when to claim the R&D tax credit. Even if you are not currently a client of our firm, you may use our R&D Tax Credit Consulting Service to evaluate your eligibility for the credit. For those using another tax preparation service for their income tax returns, we will provide a summary report of the R&D tax credit findings. Your tax preparer or accountant can then use the report, which will contain enough information to help you claim the credit properly.
Too many taxpayers and advisors fail to take advantage of the R&D tax credit benefits. Or they fail to adequately analyze and document their qualification for the credit. CMP has the resources available to help ensure that you comply when claiming the R & D credit.
How Do You Calculate the R & D Tax Credit?
There is no one-size-fits-all answer to the question of how to calculate the R & D tax credit. Eligibility and amounts vary by industry and even from state to state. The best thing to do is to allow the tax credit experts at CMP to work with you to determine your eligibility and calculate your credit. That way, you’ll save time and money, and you can feel secure in knowing that your tax credit has been properly calculated and applied.
Qualifying Activities for R&D Tax Credits
When business owners hear the words “Research and Development,” the image that comes to mind is scientists in labs, mixing chemicals, and running experiments. While those scientists probably do qualify for the credit, the reality is that the IRS uses a broad definition of R&D for tax credit purposes.
You can determine your company’s eligibility by using the same four-part test used by the IRS. To qualify, an activity must:
- Be aimed at developing or improving a process, product, formula, invention, software, or technique.
- Contain some uncertainty regarding the capability, design, or methodology of the thing being tested.
- Entail an iterative process of trial and error during the experimentation or development phase.
- Be rooted in technical or scientific principles.
If you believe your activities fit into these categories, then you may be eligible to take the federal R&D tax credit. Some states also have an R&D tax credit for businesses, including Utah. The Utah Research and Development tax credit mirror the federal credit.
CMP has been our tax advisors for many years. They spend the time necessary to update themselves every year to understand the complex tax code changes and the impact it will have on their clients. Their insight, experience, and candor will steady and sustain the decisions you make financially in this critical part of your business life. I highly recommend you spend time getting to know the people in this professional organization, and the strength they will give to your business ventures.
Research and Development Tax Credit Services
CMP’s R&D services include the following:
We have developed training materials that we are happy to present to you or your business team regarding the qualifications for and documentation required for claiming the credit.
Our proprietary toolkit was developed in-house based on applicable tax code, treasury regulations, the IRS audit techniques guide, and feedback from our clients. Our toolkit has been successfully used by many of our clients to help document qualifications for the credit, as well as to identify previously overlooked areas in which the credit has applied to their business operations.
Our consultation services cover everything from helping to ensure that applicable tax law compliance is met, and that your record-keeping and qualifying applicable business activities are properly addressed.
Study and Report
The CMP team can help you identify and document business activities that qualify for the R&D Tax Credit. This report contains all the detail needed to properly calculate the credit, as well as to enhance compliance with applicable tax law.
Learn More About Our R&D Tax Credit Services
Our tax professionals can review and consult with you on whether your business qualifies for this unique tax benefit. Talk to our team today by calling (435) 750-5566 (Logan, UT) or (801) 467-4450 (Salt Lake City, UT).