Research and Development Credit
Are you getting the R&D Credit you deserve?
If your company conducts research, and you haven’t explored whether it qualifies for the Research and Development (R&D) Tax Credit, then you could miss an opportunity to receive cash refunds for both current and prior tax years. And if you haven’t previously qualified for the credit, there’s a good chance you do now. Congress recently broadened the eligibility requirements and made the process less tenuous for companies to qualify.
Significant changes have occurred in the last few years, which include eliminating the requirement that new science had to be discovered and allowing certain costs, even though the new or improved product is not ultimately a success. Types of activities that qualify include:
- Designing, developing or formulating new and/or improved products
- Implementing and experimenting with new techniques or equipment
- Testing, evaluating or improving materials
- Streamlining or improving production and manufacturing processes
- Designing a new facility or improving an existing building
- Developing or implementing new computer software
- Paying consultants or outside contractors to assist with any of the above activities
Of course, there are specific criteria these types of research activities need to meet. They must:
- Create a new or improved product or process that adds new functionality or quality
- Be technological; governed by physics, biology, engineering or computer science, (though not required to be in a lab)
- Aim to eliminate uncertainty; seek information currently unknown, whether a project succeeds or not
- Be experimental; adhering to a scientific process, including a hypothesis and testing
As well, the new regulations provide that companies are no longer required to maintain precise timesheets that document each hour employees spend conducting qualified R&D credits. Instead, they can use any reasonable approach to determine the cost of employee or owner time, which eliminates a significant and difficult administrative burden.
Open Tax Years
The R&D credit is retroactive to all open tax years. Three or possibly four years can be filed to obtain this benefit, providing an excellent opportunity for companies to improve their cash flow.
Many industries have taken advantage of the R&D Tax Credit, including:
- Software development
- Tool and die machine shops
- Food sciences and agro-business