What are R&D tax credits?
The R&D tax credit is a dollar-for-dollar offset of state or federal income tax liability as a result of business activity that satisfies the definition of "R&D" under Internal Revenue Code section 41. Under section 41(d), a company must satisfy a 4-part test in order to be doing "R&D."
What types of activities qualify for R&D tax credits?
In general, a company may qualify for R&D tax credits if they have engaged in technical problem-solving. For example, if an architect relies on his knowledge of structural engineering to solve the challenges related to wind, shade and light, and structural support in the development of a unique design, then the architect's problem-solving activity will qualify and a percentage of the wages paid to the architect will be characterized as "qualified research expenses" and form the basis of the credit calculation. Other industries whose activities frequently qualify are engineering, manufacturing, software, agriculture, construction, and others.
What is the 4-part test?
1. New or improved business component, which includes a product, process, invention, software, formula, or technique ("new" here only means new to the taxpayer, not new to the world or industry);
2. Uncertainty as to capability, method, or final design at the project's outset;
3. Process of experimentation, which is further defined as a systemic evaluation of alternatives; and
4. Technological in nature, which means that the above process of experimentation must relay on principles of a hard science.
What types of expenses qualify for an R&D tax credit?
Expenses that qualify under the R&D tax credit regulations include:
Wages – The research expenditure is only eligible if the wage is paid to the employee for performing "R&D" or directly supporting or directly supervising "R&D" activity;
Supplies – Supplies are any tangible property other than land or land improvements and not property subject to depreciation. Supply expenses must have been used in the conduct of qualified activity. For example, if a manufacturer has scrap from the development of prototypes for any of its jobs, that scrap expense can be claimed; and
Contract Research – Contract research may be claimed for payments to third-party contractors that meet the same qualification requirements as for wages. Unfortunately, these amounts are reduced to 65% of the actual expense.
What documentation is needed to substantiate the R&D tax credit?
Companies must provide contemporaneous documentation that links an employee’s time directly to an R&D project or activity. This documentation can take many forms, and most companies will have some sort of documentation that was produced contemporaneously in connection with a project. Furthermore, this documentation can serve as the basis for a company's reasonable estimate as to how much time its employees engaged in qualified research activity.
How many years may I go back to claim the R&D tax credit?
If the credit has never been claimed, you may claim the R&D tax credit for all open tax years. Generally, there is a three-year statute of limitations period for tax returns, but certain circumstances could extend your ability to claim the benefit. At the state level, the statute of limitations varies but is usually also three years. Our detailed study and R&D tax credit calculation makes it possible for you to file amended returns/claims for state or federal refunds.