Who is Eligible for the R&D Tax Credit?

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The question of who is eligible for the R&D tax credit is the one of the most complex questions surrounding the issue. However, there are some simple guidelines that can help determine whether or not your company is potentially eligible. If your company does research that is technological in nature, and uses experimentation to ensure your products or services will work, then you are eligible for the R&D tax credit. Any company engaged in this kind of work should be tracking its research and development expenses. Even the process of research and filing to obtain a patent can be a qualified research and development expense.

If you are unsure whether or not your company will benefit from the extra expense involved in claiming the research and development tax credit it is worth consulting an R&D tax credit specialist. These professionals specialize in determining who is eligible for the R&D tax credit. Consulting a specialized tax professional to help you analyze your eligibility can ensure you are not leaving money on the table. 71% of the companies which utilize the credit have a standard industrial classification in manufacturing. The other 29% are spread across services, information, technology, architecture, and agriculture.

The full list of industries that qualify for the credit includes manufacturing, architecture, engineering, construction, software, agriculture, food and beverage, MEP contracting, tool and die, and life sciences. Many tax firms will have professionals who not only specialize in the R&D tax credit, but who specialize in applying for that tax credit within a specific industry.

There are three types of R&D credit calculation. The traditional calculation is the most complex, and benefits primarily larger companies. The start-up credit is specifically designed to account for the unique challenges faced by new companies in claiming the credit during their crucial early years. The alternative simplified credit is designed to help small and medium sized companies claim the credit without risking large IRS penalties for small mistakes.

The alternative simplified credit method for claiming the R&D tax credit is designed for companies that cannot adequately prove their qualified research expenditures through the traditional or start up calculations. This alternative method provides a credit equal to 14% of the current year qualified research expenses that exceed 50% of the average qualified research expenses for the 3 preceding taxable years. Eligible expenses for the credit are wages (for in-house R&D activities), supplies, contract research, and basic research payments.

It also used to be that this credit couldn’t be applied to past tax years through amended tax returns. The ASC method could only be applied to original returns. However that changed in 2014, which means if your company has been leaving money on the table because of the hassle this system presents, you can now go back and get the credit for previous years.

While many steps have been taken to streamline the process of claiming this tax credit, it’s still a complex process. Quantifying research and development expenses can be difficult, and time consuming. This is why many experts recommend hiring a tax professional who specializes in research and development to analyze your company’s expenses and bookkeeping methods. Even small companies often find the up-front cost is worth it. According to Wikipedia, in 2005 29% of companies that claimed the R&D tax credit had $1 million or less in assets.

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Wall Street Journal

Journal of Accountancy


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