R&D Tax Credit – Time to Revisit?
By Paul Speyer, Principal
The Research & Development tax credit (R&D) has been around in many forms since 1981. It was made a permanent credit as part of the PATH Act signed 12/18/15. This included a number of changes which has made the R&D more attractive to small and medium-sized businesses. The credit was designed to allow companies to claim a nonrefundable federal tax credit on research and development expenses. It was intended to reduce the after-tax cost of research and development and ultimately strengthen the competitiveness of U.S. companies. If you haven’t utilized the credit or been frustrated by its limitations due to the alternative minimum tax (AMT) it is time to revisit its potential to save you taxes.
To claim the federal R&D, the taxpayer must incur Qualified Research Expenditures which must meet a four-part test:
- The conducted research or experimental activity should be intended to discover information to eliminate uncertainty related to the capability or method for developing or improving a product or process;
- The activity performed must be technological in nature and rely on such principles of physical science, biological science, computer science or engineering;
- The performed activity must be intended to be useful in the development of a new or improved business component, including any product, process, computer software, technique, formula or invention to be sold, leased or licensed;
- Substantially all of the research activities must constitute elements of a process of experimentation aimed at the development of a product or process with a new or improved function, performance, reliability or quality.
These activities can be conducted in house or by external contractors. If in house, the credit can e applied to wages and salaries of employees and supervisors engaged int eh qualified research, aw well as the cost of the materials, supplies and leased computer time used in the research. In the case of contracted research, the credit can be applied to the amounts paid for qualified research conducted by external agencies such as domestic firms, colleges and universities, federal laboratories and certain nonprofit research institutions. Typical R&D activities may include developing new or improved products, processes or formulas. Developing prototypes or modes. Developing or applying for patents. Developing new technology, including software, certification testing or environmental testing. Building or improving manufacturing facilities and streamlining internal processes.
There are also excluded activities. The Internal Revenue Service (IRS) specifies the exclusion of research conducted after the commercial production; research adapting an existing product or process to a particular customer’s needs; duplication of an existing business component. Research conducted outside the U.S. or its possessions. Research in the social sciences, arts or humanities or research funded by another entity. Neither this list or the one above listing typical activities is all inclusive.
With the changes to the AMT by the Tax Cuts and Jobs act more people can now claim credits without being limited by AMT. And with the allowance of certain taxpayers being able to claim the R&D against their AMT liability, this credit is more useful and should be explored. If your company conducts what you consider R&D exploring the application of the credit may just make sense for you. Questions about the R&D Tax Credit? Reach out to your Maloney + Novotny representative or use this online contact form.