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Research & Development Tax Credit

Did you know that the types of activities that would qualify you for the R&D Tax Credit are probably much broader than you would suspect and could include things such as technical sales, design engineering, formulation, process engineering, tool development, quality engineering and documentation?  FI USA helps you understand the difinitions and eligibilitiy for R&D Tax Credit.

What is the R&D Tax Credit?

  • The Research and Development Tax Credit (R&D) is a government-sponsored tax incentive that rewards companies for conducting R&D in the United States. The credit was implemented to incentivize innovation throughout the economy and to keep technical jobs here in the U.S.
  • What constitutes R&D regarding the credit is much more expansive than business owners realize, with activities related to applied sciences and other technical projects qualifying companies from numerous industries.
  • The R&D Tax Credit is for businesses of all sizes, not just major corporations with research labs – and many companies are eligible, with an expansive list of activities qualifying for the credit.

What Qualifies for the R&D Tax Credit?

If your company does any of the following, your business likely qualifies for the R&D Tax Credit:

  • Develops or designs new products or processes
  • Enhances existing products or processes
  • Develops or improves upon existing prototypes and software

How do I claim the R&D Tax Credit?

To claim the credit, the taxpayer must simultaneously evaluate and document their research activities to establish the amount of qualified research expenses paid for each qualified research activity. While taxpayers may estimate some research expenses, they must have a factual basis for the assumptions used to create the estimates.

Examples of such documentation includes:

  • Payroll records
  • General ledger expense detail/trial balance
  • Project lists
  • Project notes
  • Other documents a company produces throughout the regular course of business

Determine R&D Eligibility

Any company that encounters and resolves technological challenges may be eligible for the R&D tax credit. That said, eligibility depends largely on whether the work a company does meets the criteria established by the IRS’s four-part test.

Four-Part Test

  • Elimination of uncertainty. A company must demonstrate it has attempted to eliminate uncertainty about the development or improvement of a product or process.
  • Process of experimentation. A company must demonstrate—through modeling, simulation, systematic trial and error, or other methods—that it has evaluated alternatives for achieving the desired result.
  • Technological in nature. The process of experimentation must rely on the hard sciences, such as engineering, physics, chemistry, biology, or computer science.
  • Qualified purpose. The purpose of the research must be to create a new or improved product or process, resulting in increased performance, function, reliability, or quality.

Documentation

Because R&D tax credits may be claimed for both current and prior tax years, companies can benefit from documenting their R&D activities, so they are well positioned to claim the credit for both situations. To claim this credit, taxpayers must evaluate and document their research activities contemporaneously to establish the amount of qualified research expenses paid for each qualified research activity. While taxpayers may estimate some research expenses, they must have a factual basis for the assumptions used to create the estimates.

Examples of contemporaneous documentation include these items:

  • Payroll records
  • General ledger expense detail
  • Project/Activities lists or notes
  • Lab results
  • Emails and other documents a company produces throughout the regular course of business