R&D Tax Credit Studies
The Research and Development tax credit is one of the most significant and valuable federal tax incentives—potentially worth thousands or even hundreds of thousands of dollars per year to qualifying companies. By taking advantage of this dollar-for-dollar credit, companies can compete and grow while reducing their tax burden and improving cash flow.
Claiming the credit requires an engineering-based R&D tax credit study. As a specialty tax firm, Tri-Merit works with companies to uncover the engineering, manufacturing and product development data needed to support their R&D tax credit claims.
We simplify a complex process and help companies determine:
- The size of their potential credit
- The usability of those credits
- The appropriate method for supporting the R&D credit claims so they hold up even under the most stringent IRS scrutiny
You deserve a specialty tax partner you trust.
What is the R&D tax credit?
The R&D tax credit is a tax incentive offered by the federal government to encourage businesses to develop new and improved products and processes. The ultimate purpose is to keep the U.S. competitive in the global marketplace.
The R&D tax credit directly addresses the two main challenges businesses face when it comes to research and development—it’s risky and expensive. Research can place a financial strain on a business because it typically requires high-paid staff to conduct it, as well as plenty of dedicated time. Many businesses also find that they must engage third-party research institutions or vendors in order to complete the work. All these things consume precious resources that businesses—especially smaller ones—can struggle to meet. And after all that expenditure of time, money and resources, there’s no guaranteed outcome of success.
That is why the R&D tax credit is available to businesses that perform qualified research, whether or not it had a successful outcome. To qualify, the research activity must seek to solve an uncertainty—in other words, there must be risk.
More good news? Businesses don’t even need to have a formal R&D department to take advantage of the incentives on offer.
An amendment to the Tax Cuts & Jobs Act (TCJA) required that all R&D costs under Section 174 be capitalized and amortized over a five-year period.
As of 1/1/2022 R&D expenses are now required to be capitalized and amortized over 5 years rather than immediately expensed.
Ready to learn more? We’re here for you.
4 Reasons to Pursue the R&D Tax Credit
Improved Cash Flow – The R&D tax credit isn’t a deduction that lowers a company’s taxable income. It is a credit that directly reduces the company’s tax bill by a full dollar for each credit dollar. This makes it a strategic tool for improving cash flow. Businesses claiming these tax credits can expect a significant reduction in their federal R&D tax credit liability.
More Capital for Growth – Less money paid in taxes means more capital for reinvestment in operations or growth. Companies that take advantage of R&D tax credits have a better ability to gain a competitive edge, explore new markets and create jobs.
Carryover to Future Years – The savings from the credit can be so significant that they offset a company’s entire tax liability for the year. The excess credits aren’t refundable, but they aren’t lost. Unused credits may be carried back to the prior tax year or carried forward for up to 20 years!
Claim Regardless of Industry – R&D tax incentives aren’t limited to a particular size or type of business. Any business, small or large, can claim for research and development tax credits, including those from agriculture, architecture, engineering, manufacturing, construction, software development, and more.
Find out how to benefit from R&D tax credits.
By taking advantage of the R&D tax credit, a midwestern software development firm saved more than $700,000 in federal and state income taxes over two years. A midwestern manufacturer of automotive parts has saved nearly $350,000 each year in federal and state taxes by bringing in Tri-Merit to assist with the credit.
Qualifying for the R&D Tax Credit
What kinds of research activities qualify for the R&D tax credit?
The R&D tax credit isn’t limited to major corporations with research arms. It’s open to businesses of all sizes and types as long as they conduct qualifying research activities (QRAs) on U.S. soil. The research activity must seek to solve a technological uncertainty and rely on hard sciences (like engineering, biology, physics, computer science, etc.) The research process must employ stringent testing and experimentation.
R&D tax credit qualified activities:
These rules are contained in the IRS Four-Part Test for Qualifying Business Activity.
The IRS Four-Part Test for Qualifying Business Activity
1. Qualified Business Component.
2. Technological in Nature.
3. Eliminate the Uncertainty.
4. Process of Experimentation.
Businesses that conduct research related to internal-use software (IUS) may also qualify for the R&D tax credit, given that the software being developed will be used for conducting the trade or business. For instance, financial institutions develop specialized software for their operations.
Businesses that develop internal-use software should also satisfy three additional criteria:
- The software must result in reduced company costs while speeding up processes.
- Software development must involve a huge economic risk. It must expend a significant amount of resources and must be subject to the uncertainty of recovery.
- The software should not be commercially available. The business shouldn’t be able to buy, lease, or license the software for its intended purpose without having to make modifications that satisfy the first two criteria.
There are specific exclusions to research and development tax credits, whether the activity is conducted by a small business or a larger corporation. Tri-Merit will go through these exemptions with you.
What kinds of research expenses qualify for the R&D tax credit?
Research expenses that qualify for the R&D tax credit are known as qualified research expenses or qualifying research expenditures (QREs).
QREs include:
- Wages paid to employees who engage in qualified research
- Certain supplies used in the conduct of qualified research
- Contract research amounts paid to a third party to perform qualified research or services (allowed at 65% of the actual cost incurred)
- Basic research payments made to qualified educational institutions and scientific research organizations (allowed at 75% of the actual cost incurred)
Our article on Qualifying Research Expenditures has more information.
Common Misconceptions About the R&D Tax Credit
With all the benefits the R&D tax incentive has to offer—combined with companies’ continual efforts to reduce costs—you would think every business would be examining their eligibility. However, misconceptions about the R&D tax credit keep many qualifying businesses from exploring the possibilities.
This can leave thousands or even hundreds of thousands of dollars in valuable tax incentives on the table.
Here are some of the most common misconceptions about the research and development tax credit.
Our project failed. We won’t qualify.
Not true. Simply tally the qualified costs up to the point of termination and include those in your company’s R&D credit calculation
We don’t quality because we have no federal tax liability.
Smaller businesses and startup companies can apply their R&D credits against their payroll tax—not just their profits.
We’re not engineers, drug researchers or software developers so we’re not a good fit.
All types of companies in a variety of industries are now successfully utilizing R&D credits.
We don’t maintain supporting documentation of our R&D or track our employees’ daily R&D activities.
Don’t miss the opportunity to take advantage of the R&D tax credit.
Claiming the R&D Tax Credit
While any company can potentially qualify for the R&D tax credit, determining if it does requires an in-depth evaluation of the facts and circumstances surrounding its research activities. The credit claim must be supported with engineering reports and proper documentation.
That’s where Tri-Merit comes in.
As your specialty tax partner, we make this complex process refreshingly simple.
- We gather data and provide a no-cost feasibility analysis.
- Should you qualify and want to pursue the credit, we proceed with the R&D tax credit study. We build out all the R&D tax credit calculations and documentation to meet substantiation requirements. This includes preparing complete engineering reports to support the claimed credits and hold up even under the most stringent IRS scrutiny.
It all starts with a discovery call. Contact Tri-Merit about an R&D tax study now.
Why Tri-Merit for Your R&D Tax Credit Study?
It’s important to feel confident in your choice of specialty tax partner. R&D tax studies require technical and engineering expertise as well as tax know-how.
Our team of CPAs, engineers and attorneys combine technical expertise with strong core values and a client-centered approach. We make your life easier by taking a customizable, flexible, and thoughtful approach to produce the best possible outcome. We engage clients in the most efficient and effective way possible, requiring minimal time and effort that results in a refreshingly simple process.
Risk Free
Our no-cost feasibility analysis determines how much you can expect to qualify for before committing to a contract. There’s only a fee if you decide to move forward with a study. Moreover, Tri-Merit assumes the risk; we’ll defend your credit should an audit occur.
Technical Expertise
Our in-depth knowledge of current IRS rules and regulations—combined with technical expertise in manufacturing, software development, engineering and tech startups—makes Tri-Merit a smart choice when you need to go beyond typical compliance work.
We Make It Easy
Working with Tri-Merit is a breeze. If you’re a public accounting firm that needs a third-party specialist to conduct a tax study, we will align our processes with yours to serve as an extension of your advisory team. If you’re a business that wants to claim R&D tax credits, we customize our approach to streamline collaborative efforts between you, your CPA and Tri-Merit.
Reliable & Transparent
Our team provides regular updates, so you are aware of the progress of the study. Expect the report to be completed and delivered by the deadline. With more than 35 years of experience, we have provided thousands of successful studies across the country.
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Be confident in the R&D tax credit partner you choose. Choose Tri-Merit.
The right people, the right process, the right partner.
Not all tax credit studies are created equal, so it’s important you feel confident when choosing a specialty tax partner.
Tri-Merit’s highly experienced team of engineers, attorneys and CPAs make your life easier by taking a customizable, flexible and thoughtful approach to produce the best possible outcome. We engage clients in the most efficient and effective way possible, requiring minimal time and effort that results in a refreshingly simple process.
