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 almost all 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. Companies may claim the credit for both current and prior tax years, and documenting their R&D activities can help ensure that they are eligible to claim the credit for all open years.
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 documentation include:
- Payroll records
- General ledger expense detail
- Project lists
- Project notes
- Documents produced through the normal 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.