/// By Skyler Kressin and Evan Macedo
Amid the scramble of PPP loans and tax reform changes of the Tax Cuts and Jobs Act—many companies have failed to fully take advantage of the reliable, long-standing income tax savings opportunities of the R&D Tax Credit.
Whether due to common misconceptions or confusion around documentation, a wide range of qualifying companies that work to develop novel or improved business components—from manufacturing, software development, medical research, or any other innovative process or products—may be leaving state and federal savings on that table. While large companies tend to know how to apply and take advantage of this credit, many family-run, closely held, start-up, or other mid-market companies who may not be overtly R&D focused overlook this significant savings opportunity.
Before you click away, thinking, “we don’t do R&D,” it’s important to note, that the R&D credit is much broader than many companies realize. Furthermore, the credit can be retroactive for three prior open tax years, and in some instances of businesses operating in loss, even further.
Four-Part Qualification Test
- Qualified Purpose: The purpose of your company’s research or work creates new or improved business components (product, process, software, technique, formula, or invention) toward improved functionality/performance/reliability/quality.
- Elimination of Uncertainty: Your company’s attempt to create a novel business component demonstrates the push to eliminate uncertainty beyond available information in established capabilities, methodology, and design of said component.
- Process of Experimentation: Your company must demonstrate that it has utilized modeling, simulation, the process of trial and error, or other methodologies to evaluate efficiencies and alternatives toward the desired outcome for a business component.
- Technological/Scientific in Nature: Your company’s process of experimentation must rely on the hard/quantitative sciences toward reaching the desired outcome of the business component.
When considering the range of companies and industries that utilize hard sciences—like engineering, chemistry, biology, physics, and computer science—in the development of the process they use and the products they offer, it’s easy to see how broadly these four qualifying steps can be applied. Even industries that you might not think of – like beer brewing and winemaking – can utilize these technical fields in the development of new offerings, so don’t limit your conception of what can qualify.
How Much Can Your Company Claim?
The amount of R&D tax credit your company can claim depends on an array of factors based on wages paid, R&D directed expenses and legal fees, amount paid in federal income tax, etc. Generally, up to 10% of annual documented R&D costs can be credited back on the federal level and in some cases significantly more in additional state credits.
Careful reporting and documentation are required to ensure compliance and avoid increased scrutiny by the IRS. Payroll records, detailed expenses, lab results, project notes, and email history may be necessary to show the parameters and scope of associated R&D efforts, but the hundreds of thousands in potential savings makes the process well worth it.
Recent Examples of Real-World R&D Tax Credit Returns
Light Manufacturer: A closely held light manufacturing business which developed and brought to market a newly designed product during 2020 was able to qualify for over $320,000 in federal and state Research and Development (R&D) income tax credits, directly offsetting the amount of tax due by the entity and its owners.
Commercial Space Designer: A closely held technical design firm focusing on commercial spaces was able to claim R&D credits of roughly $420,000 in a single tax year due to the technical nature of the ongoing design and development work it engaged in.
Biomedical Company: A privately held and funded biomedical research company was able to claim upwards of $450,000 in R&D tax credits due to the research costs it committed to developing new products after successfully defending every cent of the federal portion of the credit from IRS examination.
How I can Help
As a CPA focused on Strategic Tax Planning for Entrepreneurs, Inventors, Family Businesses, and Innovative Enterprises, I specialize in helping mid-market companies, like yours, take full advantage of this opportunity. For more information on the qualification and documentation parameters of the R&D Tax Credit, and how I might help you to apply and prepare materials to participate, contact me at your earliest convenience:
Skyler Kressin is a partner at Dominion Enterprise Services and not affiliated with Sapers & Wallack.
Sapers & Wallack does not provide legal or tax advice. For complete details, consult with your attorney and tax advisor.