Did you know that many U.S. companies are eligible for the research and development (R&D) tax credit? Most companies don’t take advantage of it by several reasons: they don’t know about this possibility, not sure if their company qualifies, or don’t bother to apply. They are losing hundreds of thousands of dollars. Let’s take a look what exactly is the research and development tax credit?
(R&D) Tax Credit is the US Government tax incentive aimed to foster innovation. It was launched in 1981 as a temporary initiative and became permanent in December 2015. The main idea is that it allows companies to claim up to 14 percent of their eligible R&D expenses. This percentage varies from state to state.
Who Is eligible? It is generally believed that only research labs or large corporations are eligible for the credit. In fact, all businesses of any sizes may apply for the tax credit if they conduct research or experimental development on condition that they can prove it. To qualify you don’t necessarily have to work on a breakthrough technology, even the effort can be rewarded.
According to the U.S. IRS agency R&D expenditures include nearly all expenditures related to the development or improvement of a product, among them salaries paid to the employees who took part in the R&D activities; supply and material costs related to the R&D, including prototype models; contract costs.
There some criteria companies must satisfy to qualify for the R&D tax credit:
- Research should contain new knowledge about product development or improvement.
- It should involve experiments.
- Be technological.
- Have a qualified purpose, such as creating or improving product or process.
You can apply for the tax credit for at least three past year. The most important part of applying for R&D taxes is to support your claim with evidence. First of all, you will need to have all your activities documented:
- Prepare documents to demonstrate your R&D activities, including patent claims, lab reports, experiment descriptions, logs and even internal emails related to research and development activities.
- Use online timesheet software reports and records with a detailed breakdown of working hours by activity.
- Keep your agreements and with subcontractors and issued invoices.
- Make sure all the documents will be presented in usable form and sufficient details.
- Don’t forget to provide Form 6765 or form 3800 for small businesses.
When everything is ready, you should submit your application to the Internal Revenue Service. To streamline the application process, it is reasonable to find a good tax advisor because the state requirements might be different from the federal ones.
R&D tax credit provides a great opportunity to cover a part of your research expenses and use it to fuel future projects, don’t miss it.