Tax time brings a range of feelings for business owners. Whether it’s indifference or mild anxiety, no one loves the thought of paying taxes on the profit. But there are certain things to get excited about — tax credits.
Credits are incentives put forward by local, state, and federal governments to encourage certain behaviors. You’ve probably heard of some of these like:
- Employee Retention Credit (ERC): To help promote high employment levels and empower small businesses.
- Work Opportunity Tax Credit (WOTC): Incentivizing and encouraging new hires in small businesses.
- And the 45L: Promoting and incentivizing the creation of clean energy homes.
There’s also the R&D tax credit, where we’ll focus this resource. This particular credit incentivizes advancements. They are moving the needle in process, technology, and innovation. Unfortunately, many businesses fail to fully capitalize on the R&D tax credit (if they claim it at all).
The reason? Mostly it’s a lack of information about the R&D tax credit and a lack of knowledge regarding how to go about claiming it.
The Opportunity is There (for Many)
It’s tax time. You have to file your return, whether or not you show a profit. So, why wouldn’t you look to see if you did any qualifying research and development that counts toward the R&D tax credit or conducted any R&D tax credit qualified activities?
You may think, “we’re not a think tank” or “this is for engineers.” Believe it or not, you possibly meet the requirements if (in the taxable year) your company:
- Created new or innovative products
- Made improvements to existing solutions
- Applied for patents, built examples (prototypes), or coded software
- Employed the services of scientists, engineers, developers, and/or designers
Many companies do these things every year, and very possibly yours does, too. But, while any company that innovates in these ways could qualify, some industries cater better to the opportunity.
- Food and beverage companies
Further reading: We go into the how and why of these industries using the R&D Tax credit in this article.
But I Don’t Have an “R&D Department”
A common concern among organizations is they don’t have a dedicated research process and believe that is a prerequisite for claiming the credit. Unfortunately, that’s not the case. Many, if not most, businesses that obtain this credit don’t have a dedicated crew for R&D.
That said, qualifying does take a detailed look through expenses and the knowledge of ensuring you meet the criteria. It’s good to partner with an accounting solution experienced in the process.
What Type of Expenses Qualify?
Primarily, the credit is tabulated on qualifying expenses (all based in the U.S.) related to the research and development of software, products, and/or processes. A few examples of these qualifying expenses include:
- Wages (including contractors) for engineers, developers, designers, and scientists
- Supply costs associated with the research and development
- Tangible raw materials (as long as they haven’t been depreciated nor capitalized)
How is the Credit Delivered?
This credit promotes employment as much as it is to promote technological and process advancements. As a result, most of the qualifying expenses are related to payroll, and that’s typically how businesses will benefit from the credit.
For example, if a software company spends $100,000 in qualifying wages and supplies, the organization may receive a $10,000 credit after calculations. This credit is typically used when filing form 941 for quarterly payment to offset FICA tax.
Calculating the Benefit is Tricky
Many businesses likely qualify for the R&D credit, but few know the specific requirements (a lack of info). But then, there’s going through the process, figuring out which expenses qualify, whether or not the company does qualify, and then calculating the amount of the credit to offset the tax burden.
As with many tax credits, there is a longer list of things that don’t qualify than the list of approved expenditures. For instance, all labor must be from the U.S., and the advancements themselves must advance U.S. technologies.
Things like “market research,” “focus groups,” and “management expenses” also don’t count.
The Knowledge You Need for Tax Credits
Tri-Merit specializes in helping companies claim all available tax credits — including credit for your R&D qualified activities.
Our expert team of certified tax coaches is ready to consult with you to determine your eligibility and the potential benefit to your organization. If you’re ready to reduce your tax burden and successfully apply for applicable tax credits, schedule a consultation with us today.