R&D Tax Credits

As your company completes your 2015 books, and finalizes your 2016 budget and goals it may be fruitful to explore the potential of an R&D Tax Credit.

The R&D Tax Credit, first enacted in 1981, is a government-sponsored benefit that provides cash incentives for companies conducting R&D in the U.S. Each year, the R&D credit yields billions of dollars in federal and state benefits to companies engaged in qualifying research.

Most recently, the Senate Finance Committee passed a bipartisan amendment that created two significant changes: 1) start-ups are effectively eligible for the first-time and 2) small and medium business are allowed the R&D tax credit to be claimed against the individual AMT for 2014 and 2015.

These changes will allow start-ups to take a credit of up to $250,000 against the payroll taxes the company pays on its employee wages. The benefit is available only for companies that have existed for less than five years and that have less than $5 million dollars in annual gross receipts. Note, that the PATH Act of 2015 allows eligible small businesses (i.e., $50 million or less in gross receipts) to claim the credit against the Alternative Minimum Tax (hereinafter “AMT”) for tax years beginning AFTER December 31, 2015.

Additional potential benefits include:

  • Up to 13.5 cents of R&D tax credit for every qualified dollar
  • A credit is a dollar-for-dollar reduction in your federal and state income tax liability
  • Increased earnings-per-share
  • Improved cash flow
  • The R&D Credit is carried forward up to 20 years
  • Recent regulatory developments support easier R&D tax credit claims
  • Look back studies can recognize unclaimed credits for open tax years
    (generally 3 or 4 years)

Who Qualifies?
The definition of R&D for tax credit purposes is quite broad. Companies are able to qualify activities ranging from concept development to the point where a product, process, formula, or other business component is ready to be commercially released. If your company is engaged in any of the activities below, looking into a potential R&D credit may prove worthwhile.

  • Developing or engineering a new or improved product, process, formula, or software
  • Evaluating the feasibility of a product, process, formula, or software
  • Developing engineering architecture
  • Developing experimental models & prototypes
  • Testing an experimental product, process, formula, or software
  • Beta testing
  • Improving processes or the manufacturability of a product
  • Technical design reviews
  • Participating in technical meetings
  • Documenting the results of research
  • Maintaining research equipment
  • Compiling research data
  • Fabricating experimental models
  • Experimenting with new technologies
  • Creating more efficient and environmentally friendly designs
  • CAD or 3D Modeling
  • Supervising technical personnel engaged in R&D

If your company is already involved with R&D, there is no reason to not do bonus research to see if it qualifies for federal or state tax credits. Why not get your money back?

If you need advice on R&D Tax Credits or other approved Government Accounting issues give Green Tape a call or send us an email to Donna@GreenTapeLLC.com.