The R&D Tax Credit program rewards companies that work to solve everyday problems with a dollar-for-dollar offset of tax liability. The tax credit is available for any company that invests in its own product development and product improvement or provides engineering and technical services. While there are a plethora of guidelines governing the R&D Credit, in general, if a company’s work can meet what is known as the four-part test, then most likely it will be able to take advantage of this tax benefit. Each test is outlined as follows:
- Business Component Test- A company must prove that it is working to develop or improve its own product or process or is providing engineering and design services under contract with a client.
- Uncertainty Test- A company must prove that it encounters uncertainty when attempting to take a product or project from concept to completion. In general, it must show that the techniques, formulas, and designs needed to achieve success were unknown at the outset of the project.
- Experimentation Test- A company must show that it uses a repeatable process of trial and error to take a project from concept to completion and eliminate any uncertainties. In general, a company is performing experimentation if it has to evaluate one or more alternatives to achieve a successful outcome.
- Technical in Nature Test- The work must rely on the principles of science, engineering, mathematics, computer science, chemistry, etc. to qualify.
There are a lot of myths surrounding this credit and who qualifies. Gone are the days when only large companies discovering new technologies were rewarded through this part of the tax code. If your company can pass the four-part test, then the wages, contractor expenses, supplies, and cloud computing costs associated with your R&D can be claimed towards this credit. For qualified startups, the credit may be used to offset the employer portion of payroll taxes.
In general, for every dollar of qualified research expenditure, a company will receive between 8 and 10 cents of tax credits. These tax credits directly offset any taxes owed. For pass-through entities, the tax credits flow directly to the owner’s tax returns. Companies from numerous industries qualify for this credit including, but not limited to:
- Aggregate & Mineral Production
- Architecture & Engineering
- Automotive Industry
- Bridge Building/Asphalt and Cement
- Chemical Plastic
- Cyber Security
- Emerging Technologies
- Engineering Construction
- Internet of Things
- Life Sciences
- Systems Integration
- Software Development
Diligentiam specializes in helping companies analyze their activities and quantify qualified expenses connected with R&D. Our experts rely on the codified rules of the tax code, IRS audit guidelines, and Tax Court rulings to build audit-proof reports and to provide CPAs with all of the information needed to claim the credit for the taxpayer. Please contact us to see how your business can benefit from this benefit.
To see how much money in credits you may qualify for, please visit our Free R&D Tax Credit Estimator.
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