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Research and Development Credit
Research and Development Credit

Research and Development Credit

Updated over a week ago

Some businesses might qualify for Research and Development Credit. What is this credit? It is credit for work you have done already and can be claimed by tax paying businesses that develop, design or improve products, processes, formulas or software. The credit was introduced in 1981 to increase technical jobs in America by encouraging businesses to invest in innovation.

If your company does any of the following, your business likely qualifies for the R&D Tax Credit

  • Develops or designs new products or processes

  • Enhances existing products or processes

  • Develops or improves upon existing prototypes and software

There are 3 parts of R&D credit:

  1. Salary and wage expenses.

One of the biggest components Box 1 of W-2 form for research, direct supervision and support. One detail - must be US based.

  1. Third party expenses

Services performed by non-employee or contractor. Side note: maximum use for R&D credit is 65%

  1. Supplies.

Non-depreciable, tangible personal property used in development activities, generally consumed or destroyed during the process. If supplies are destroyed - documentation is the key.

Examples of such documentation includes:

  • Payroll records

  • General ledger expense detail

  • Project lists

  • Project notes

  • Other documents a company produces throughout the regular course of business

These records combined with credible employee testimony can form the basis of a R&D Tax Credit claim. For most companies the credit is around 10% of qualified research expenditures.

R&D Tax Credit can be taken against Alternative Minimum Tax (on owner’s personal return) or against Payroll taxes and processed through payroll company - Gusto. Gusto is partnering with ClarusR&D company who specifically works on Tax Credits.

You can schedule a call with Clarus representatives and they will walk you through the process, prepare necessary documents, check what expenses can qualify and calculate the amount of R&D credit. Side note: ClarusR&D does charge 10-12% of your credit as a fee for their services. If you do not qualify for the R&D tax credit, there is no cost to you, so why not to check in with them.

Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining accounting or other financial advice from an appropriate financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.

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