The federal R&D tax credit, also named the Research and Development tax credit, was instituted in 1981 as a two-year provision but has been a part of the tax code since then. It is an incentive for companies in the United States to increase their investment into research and development for the current tax year. Any company that is involved in developing new, technologically advanced or improved products and processes is eligible to apply. This credit can also help start up companies offset their payroll taxes up to $250,000/year for up to 5 years. Businesses in the San Diego area can benefit from consulting with a San Diego tax firm to understand this important business tax credit.
What qualifies towards the R&D tax credit?
To qualify for the R&D credit, you must have taken part in certain types of activities such as ones that seek to resolve technological uncertainty that is related to either the capability or methodology for development or improvement of a business component; that are related to a hard science; or that involve experimentation in testing and evaluation of alternatives for elimination of technological uncertainty.
- Wages – Wages that are paid to employees for qualified services are permissible.
- Supplies – Supplies that are used during an R&D process are considered eligible for this deduction.
- Contract research expenses – Qualified Research Activities that are performed by third parties on behalf of the taxpayer are allowed at 65 percent of the real cost.
- Basic research payments – Taxpayers can claim basic research payments that are made to educational institutions and other scientific research entities
What wouldn’t count:
- Research conducted after commercial production or implementation
- Market research, testing or development
- Funded research
- Research in social sciences
- Computer software, unless for internal use
- Adaptation or duplication of existing business components
- Routine data collection
- Ordinary testing for quality control
If there is uncertainty about whether a company or taxpayer may qualify for the R&D credit, a four-part test can be used to determine eligibility.
- Permitted purposes – Does the activity relate to a new or improved business component’s performance, quality, reliability or function?
- Technological in nature – Does the activity focus on principles in the areas of physical, biological, engineering or computer sciences?
- Elimination of uncertainty – Will the activity eliminate uncertainty concerning the methodology or capability for development of improvement of a product or process?
- Process of experimentation – Does the activity utilize experimentation involving evaluation of alternatives; simulation; refining or discarding of hypotheses; or confirmation of hypotheses?
Launch CPA is a San Diego tax firm that specializes in business tax and accounting/bookkeeping services. Realizing all the tax credits and deductions that a business is eligible for can be daunting and confusing for many companies. The R&D tax credit in particular is a credit often overlooked by small to mid-size businesses. Launch CPA, a San Diego accounting firm, is experienced with working with businesses to explore such credits so they can focus on what’s important, their business.
Call us today at (619) 663-7275 to receive a free consultation!