The Research and Development Tax Credit
By Ryan Immitt, Tax Manager
The Incremental Research Expense Credit (more commonly known as The Research and Development Tax Credit) has been around quite a while now, but many small businesses do not claim it. Some taxpayers have evaluated it in earlier years and determined that it did not apply to them or would only yield a minimal credit that would benefit them less than the cost of reporting it while others are under the misconception that it only applies to large companies. The R&D credit saves taxpayers approximately 10 to 12 billion annually. However, while large companies take full advantage of the R&D tax credit, only 1 in 20 eligible small businesses benefit from it.
Under the most recent regulations, more businesses qualify than ever before. Also, the R&D tax credit regulations allow eligible taxpayers to amend all open tax years (typically the three preceding years) for potential research credits that were never claimed.
According to the IRS, “The expenditures of Research and Development (“R&D”) are reasonable costs you incur in your trade or business for activities intended to provide information to help eliminate uncertainty about the development or improvement of a product. Uncertainty exists if the information available to you does not establish how to develop or improve a product or the appropriate design of a product.” In other words, a company that designs, develops, or improves products, processes, techniques, formulas, inventions, or software may be eligible. Further, if a company has simply invested time, money, and resources toward the advancement and improvement of its products and processes, it may qualify.
As to the issue of applicability, the R&D tax credit can be applied to a broad range of industries. To name a few: manufacturing & fabrication, software development, engineering, architecture, pharmaceutical, machining, metalwork, food processing or manufacturing, cosmetic development, and more. Also, the credit is recognized, although calculated differently, in 38 states with several states looking to expand their R&D tax credit.
Previously, the R&D credit was added back or lost to taxpayers in the alternative minimum tax (AMT). Similar to the treatment in 2010, it is not an add-back for AMT purposes in 2014 and 2015. This will allow many more small business to benefit from the R&D tax credit. Hopefully, the removal of this credit from AMT treatment will be renewed beyond 2015, when it is set to expire, by one of the future extender packages.
Now can be a good time to consider or re-consider whether your business qualifies for the R&D tax credit. If you believe your business may qualify for the R&D tax credit, please do not hesitate to contact us for consultation.