SEIZING TAX CREDIT OPPORTUNITIES FOR INCREASED RESEARCH ACTIVITIES
Many businesses are often uninformed or misinformed about the full extent of tax benefits they are eligible for under the federal and state tax credits for research expenditures. These credits can reduce the tax liability of a company and its owners on a dollar-for-dollar basis. This credit is a tax incentive designed to encourage a business in nearly any industry for its efforts to research and develop new products and processes.
Those in the manufacturing and construction industries are well-suited for this credit as competition in the marketplace forces them to continually look for ways to improve their products and processes to become more efficient. They often need to invest in research efforts just to survive, and thus the research credit tax is an added bonus for their research investment.
THE RESEARCH & DEVELOPMENT TAX CREDIT PROCESS
Identify Qualified Research Activities
The tax law indicates that qualified research eligible for this credit must satisfy the following four criteria: permitted purpose, technological in nature, process of experimentation, elimination of uncertainty.
Capture All Qualified Research Expenses
Qualified research expenses include: in-house expenses for the company’s own research; covering the salaries and wages of the personnel involved in the research activities (including employees directly supervising the researchers, as well as clerical support of research activities); supplies consumed in the research activities; and 65% of the amounts paid for outside contract research. Foreign research, research in the social sciences, arts, or humanities, or funded/subsidized research does not qualify.
Claim the Research Credit
The amount of the research credit involves a complicated formula with several limitations.
The research credit, once calculated, is available to both taxable C Corporations and owners of pass-through entities (S Corporations and Partnerships/LLCs).
Document and Optimize
The most frequent issue raised in audits is the lack of documentation that the company’s research spending satisfies qualifying tests noted above, as well as support for the various expenditures. Without proper documentation, any claimed credits are potentially jeopardized upon a tax audit.
