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What Qualifies for the R&D Tax Credit?

Many businesses are still unaware that R&D credit eligibility extends beyond product development to include activities such as the latest manufacturing methods, software development, and quality improvements. Even start-ups may be able to utilize the R&D credit against their payroll tax for up to 5 years.

So, if your company does any of the following, your business likely qualifies for the research and development credit:

  • Develops or designs new products or processes
  • Enhances existing products or processes
  • Improves upon existing prototypes and software

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What is the R&D Tax Credit?

The Research and Development (R&D) tax credit continues to provide one of the best opportunities for U.S. businesses to reduce their tax liability substantially. Companies from various industries can qualify for this government-sponsored tax benefit just by performing their day-to-day activities. This government-sponsored tax incentive, as prescribed in 26 U.S.C. § 41, may be claimed by taxpaying businesses that develop, design, or improve products, processes, formulas, or software.

The credit was introduced in 1981 to increase technical jobs in America by encouraging businesses to invest in innovation. It is calculated based on the wages of the employees performing the qualifying work, making it the most valuable, permanent tax incentive available to American businesses. Furthermore, it can be claimed at the federal and state levels, with over 30 available state credits.

This works for businesses of all sizes, not just major corporations with research labs. What constitutes R&D concerning the credit is much more expansive than business owners realize.

Claiming the R&D Tax Credit

Several factors go into claiming the research and development tax credit. Since companies may claim the credit for both current and prior tax years, they can benefit from documenting their R&D activities to ensure that they are eligible to claim the credit in both situations.

Businesses need to continuously evaluate and document their research activities to authenticate the costs incurred for each qualified research activity. While some estimations may be involved, they must have a genuine basis for the assumptions used to create those estimates.

Examples of such documentation include:

  • Payroll records
  • General ledger expense detail
  • Project lists
  • Project notes
  • Other documents a company produces throughout the regular course of business

These records coupled with credible employee testimony can form the basis of an R&D tax credit claim. Our comprehensive process can quickly identify and gather this information to substantiate your claim, ensuring you receive the total value you are entitled to under relevant I.R.S. guidelines and Treasury regulations.

Calculating the R&D Tax Credit

In 2021 alone, alliantgroup delivered over $2.3 billion in credits and incentives to over 14,000 businesses. And we do not want to stop here without helping you. Let our tax credit consultants research and provide information that you need to understand how this tax credit can genuinely benefit your business.

Take our short quiz to get an idea of what this benefit can look like for your business today.

erc credit eligibility check

What Costs Qualify for the Credit?

Wage, supply, contractor, and computer costs coupled with credible employee testimony can form the basis of an R&D credit claim.

How Has the R&D Tax Credit Expanded Over the Years?

Established in 1981, the Research & Development tax credit has gradually evolved, with new legislation, regulations, and judicial precedent expanding the number of businesses that can benefit from the credit and the savings accrued through this incentive.

The most impactful changes have occurred within the last two decades.

2003

With the removal of the Discovery Rule, a new and much more favorable standard was introduced, which stated that research activities no longer had to be “new to the world“ but instead “new to the taxpayer. “

2015

The Protecting Americans from Tax Hikes (PATH) Act made the R&D credit permanent and modified the credit for the benefit of small and mid-size businesses, and opened up its availability to start-ups.

How Do the New I.R.S. Updates Affect How We Claim this Tax Credit?

The new information requirements pertain to a research credit claim’s business components, activities, and costs. For a claim to be valid, taxpayers must provide the following:

  • Identify all the business components to which the credit can be applied that year;
  • Identify all research activities they’ve conducted and name the individuals who led, supervised, and supported each research activity, as well as the information each individual sought to discover; and
  • Identify the total qualified employee pay expenditures, total qualified supply expenses, computer rental costs, and total qualified contract research expenses for the claim year. These costs are reported on Form 6765 (Credit for Increasing Research Activities).
WHITEPAPER

The R&D Tax Credit:
Driving American Innovation
& Job Creation

In this whitepaper, you will learn:
  • In this whitepaper, you will learn:
    • Which industries and companies are benefiting the most from the R&D credit
    • Why changes relating to laws, regulations, guidance, and court decisions have greatly expanded the number of companies that are eligible for the credit
    • Why business owners and CPAs tend to overlook the R&D credit in regard to their tax planning

How Does the R&D Tax Credit's "Startup Provision" Work?

Start-ups and small businesses may qualify for up to $1.25 million (or $250,000 each year for up to five years) in the federal Research and Development tax credit to offset the Federal Insurance Contributions Act (FICA) portion of their annual payroll taxes.

To be eligible, a company must:

  • Have less than $5 million in gross receipts for the credit year; and
  • Have no more than five years of gross receipts.

Can the R&D Tax Credit Be Used to Offset the Alternative Minimum Tax?

Yes! The Protecting Americans from Tax Hikes (PATH) Act of 2015 leveled the playing field among companies, irrespective of size, allowing start-ups and small corporations alike to mitigate alternative minimum tax (AMT) limitations against the R&D tax credit.

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We’ll discuss your eligibility and help estimate your potential tax benefit.