Maximize Your Cash Flow
The Research and Development (R&D) Tax Credit is one of the best opportunities for businesses to reduce their tax liabilities, improve cash flow, and increase earnings-per-share. This tax credit was initially enacted in 1981 to incentivize companies to increase their investment in developing new or improved products or processes.
What is the R&D tax credit?
It provides a dollar-for-dollar cash savings each year to companies that perform activities related to the development of new, improved, or innovative processes and products. There is no limitation on the amount of expenses and credit that can be claimed each year.
Several industries are eligible to receive R&D tax credits. This article will focus on the benefits for the following industries:
What are some qualifying R&D job titles?
- Civil, Electrical, Mechanical, Structural, or Environmental Engineer
- Designer or Drafter
- Construction or Project Manager
What are the qualifying research expenses?
- Wages paid to employees for qualified services.
- Supplies used and consumed during the R&D process.
- Research expenses paid to a third party.
- Research payments to qualified education institutions and various scientific research organizations.
What are the qualifying research activities?
Companies responsible for design, engineering or new construction, often have qualifying activities. Examples include:
- Creation of new or improved processes, methods, and techniques used in the construction process.
- Design and development of new or innovative buildings and related components.
- Development of new or innovative electrical, HVAC, or energy-efficient systems.
- Design of temporary systems such as falsework, shoring, and dewatering systems.
- LEED Certification
- Developing preliminary design and development plan.
- Creating new software to use internally to interact with vendors or customers.
- Formulation of schematic designs.
- Construct preliminary CAD modeling and testing.
How much can a company save with the R&D tax credit?
Depending on company size and types of activities performed, our clients have saved anywhere from $10,000 to $1 million through R&D tax credits. The amount saved is based on the total expenses eligible for the credit. The revenue of the company is not relevant to the amount of credits available. The average percentage of credits available to a company is approximately 10 percent of the total eligible R&D costs.
Can I offset my alternative minimum tax (AMT) with the research credit?
For tax years beginning after December 31, 2015, eligible businesses may claim the R&D credit against their AMT tax liability if gross receipts are $50 million or less. If your business is a qualified start-up company with less than $5 million in gross receipts, you may also elect to use up to $250,000 of the R&D tax credit against payroll taxes.
Can I claim the R&D tax credit on amended returns?
R&D tax credits are available to be taken on amended tax returns going back three previous tax years.
How can I apply for the R&D tax credit?
Any size companies are eligible for the R&D tax credit, and many small-to-medium-sized businesses are missing out. The first step is to analyze the types of projects your company is working on to identify eligible activities. Smith Schafer works with R&D tax credit specialists that conduct a study to determine savings. While you may be tempted to try to calculate the credit on your own, there is expertise required to identify and collect the correct information. An expert will most likely be able to obtain a larger tax credit than if you would try to claim this on your own. Also, claiming it incorrectly may result in the loss of credit and possible penalties from the IRS.
Questions about R&D Tax Credits?
We are here to help. Smith Schafer can examine your company’s activities and determine which areas are eligible for the R&D tax credit. Send us a message to schedule a free consultation.