What is R&D Tax Credit?
- The Research and Development (R&D) Tax Credit is a federal incentive designed to encourage businesses to invest in innovation by providing a dollar-for-dollar reduction in tax liability.
- This credit rewards companies for engaging in qualified research activities (QRAs).
Are you eligible?
Qualified Research Activities (QRAs) must meet the following four criteria:
- Permitted purpose: Improving functionality, performance, reliability, or quality of a business component.
- Technological in nature: Based on principles of science, engineering, or computer science.
- Elimination of uncertainty: Aiming to solve unknowns about a product or process.
- Process of experimentation: Using trial and error, modeling, or simulations to find solutions.
What doesn't qualify?
- Research done after commercial production starts
- Adapting existing products for specific customers
- Copying existing products/processes without innovation
- Market research, surveys, and routine studies
- Internal-use software (unless it meets special criteria)
- Research conducted outside the U.S.
- Non-technical fields like social sciences or humanities
- Research funded by another party
What expenses count?
- Wages: Paying employees directly involved in QRAs, supervising, or supporting such activities.
- Supplies: Tangible property used in the conduct of QRAs, excluding land, improvements, and depreciable property.
- Contract Research: 65% of expenses paid to third parties for conducting QRAs on behalf of the taxpayer.
- Basic Research Payments: Payments to qualified educational institutions and certain scientific research organizations.
How much can you claim?
- Traditional credit calculation: 20% of QREs exceeding a base amount, which is determined by multiplying the fixed-base percentage by the average annual gross receipts for the prior four tax years.
- Alternative simplified credit (ASC): 14% of QREs exceeding 50% of the average QREs for the three preceding tax years. If no QREs existed in any of these three years, the credit is 6% of the current year's QREs.
Section 280C Election – Keep more of your deductions!
- Purpose: To avoid reducing the allowable deduction for wages by the amount of the R&D credit claimed.
- Election: Allows taxpayers to claim a reduced credit amount instead of reducing wage deductions.
- How to Elect: Indicate the election on Item A of Form 6765.
Payroll Tax Credit for small businesses
Startups & Small Businesses – This one’s for you!
- Eligibility: Businesses with less than $5 million in gross receipts and no gross receipts prior to the five-year period ending with the tax year.
- Benefit: Can elect to apply up to $500,000 of the R&D credit against the employer portion of Social Security taxes.
- Election Process: Make the election on Form 6765, Section D.
- File Form 6765 with your tax return
- Attach all required schedules and statements
- Deadline: Submit it with your original return (including extensions)
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