by Rick Lazio, Former U.S. Congressman; alliantgroup Senior Vice President
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Is your business working to enhance existing products, methods, or software? Are you developing new products and processes as part of your daily operations? Have you customized, integrated or developed products around client specifications?
The Research and Development Tax Credit can be a potent tool that can aid in minimizing your taxable income and provide immediate funding for future innovations. In fact, it remains the largest permanent tax break available to a business.
The incentive stimulates economic growth by rewarding small and medium businesses for their everyday work. It continues to offer one of the best opportunities for American companies to decrease their tax liability, hire more technical employees and improve business operations.
The onset of the R&D Tax Credit
Introduced in 1981, this benefit was developed to incentivize U.S. firms to keep technical jobs within the nation and drive domestic innovation. Over the years the incentive was updated to respond to economic crises and expanded to include almost every industry from software and tech to agriculture.
How does the R&D credit work?
The tax credit is a dollar-for-dollar credit against taxes owed. Businesses that spend their money to create new products/processes/services or work on improving existing ones can claim the qualified research expenses (QREs) against their taxes.
Some instances of business activities that may qualify for the tax credit.
- Designing/developing new products/processes
- Enhancing existing products or processes
- Creating custom designs and products for clients
- Writing or editing code
- Experimenting with different materials or methods
- Integrating products
The four-part test
Whether work qualifies as R&D is dependent on whether the work satisfies the four-part test.
- Permitted Purpose: Projects qualify if a business is making new or improving on products, processes, techniques, formulas or software.
- Elimination of uncertainty: The project activities need to eliminate technical uncertainties. As long as there are questions about the capability, methodology, or appropriate design of the business component, and the work is meant to resolve that uncertainty, the project may qualify.
- Process of experimentation: The taxpayer needs to follow a trial-and-error approach and assess multiple alternatives to derive the outcome. Essentially there needs to be an adherence to the scientific method.
- The experiment utilized to discover the information should depend on the principles of biological, physical sciences, and computer science, and the taxpayer can use existing technologies to obtain the result.
Does your business qualify?
While it may seem like there are a lot of technical requirements, the truth is your business may qualify based on the work you are already doing every day. Almost any industry can qualify for the credit. Here are just some examples of business activities that qualify:
- IT Solutions Provider that provides customized technology solutions for clients’ needs.
- An animal farm that is experimenting with different feeds and anti-biotics;
- A software publisher that creates new apps or customizes low code platforms;
- An audio-visual integrator that connects entertainment equipment together for clients;
- A manufacturer that experiments with different materials or produces products to client specifications; or
- An architecture firm that designs buildings for clients.
This list is, of course, not completely comprehensive but it should give you an idea of how broadly R&D applies.
Your competitors are likely already claiming
The R&D Credit has been there for nearly 40 years and is enabling businesses to save millions of dollars in tax savings annually. Many businesses are already claiming the credit and it is allowing them to hire more workers and reinvest in their operations. In fact, the credits received are sometimes worth more than profits earned for a year.
If you are unsure about your qualifications, contact a trusted tax advisor like alliantgroup for a complimentary consultation.
About the Author
Rick Lazio is a former U.S. Representative from New York serving in Congress from 1993-2001. While there, he became a strong advocate for small businesses by sponsoring the successful Small Business Tax Fairness Act. After Congress, Rick moved to the private sector working for JP Morgan Chase as a Managing Director and then Executive Vice President. Rick is committed to his continued interest and support of small to mid-sized businesses by brokering his insight and experience in the public and private sectors to provide strong incentives for job growth. This interest has extended into his civic and philanthropic work in New York with the Committee for Economic Development and the Association for a Better New York.