What you need to know
This credit is designed to reward companies that develop, design, or improve products, processes, formulas, or software. Introduced in 1981, the R&D Tax Credit aims to boost technical jobs in the U.S. by encouraging businesses to invest in innovation.
How Much Could You Save?
For many companies, the R&D Tax Credit can amount to about 10% of qualified research expenditures. It's a significant incentive that can be applied against certain tax liabilities such as the Alternative Minimum Tax on your personal return or even payroll taxes.
Does Your Business Qualify?
Your business likely qualifies for the R&D Tax Credit if it engages in any of the following activities:
Develops or designs new products or processes
Enhances existing products or processes
Develops or improves existing prototypes and software
How the R&D Tax Credit works
Key Components
Salary and Wage Expenses: This includes wages reported in Box 1 of the W-2 form for employees involved in research, direct supervision, or support activities. It's important to note that these activities must be based in the U.S.
Third-Party Expenses: This can include payments made to non-employees or contractors who perform eligible R&D activities. Generally, you can claim up to 65% of these expenses for the R&D credit.
Supplies: This refers to non-depreciable, tangible personal property used directly in R&D activities. These supplies are usually consumed or destroyed during the development process, and thorough documentation is crucial.
Required Documentation
Proper documentation is critical to support your claim for the R&D Tax Credit. This might include:
Payroll records
General ledger expense details
Project lists and notes
Other relevant business documents
Credible employee testimonies, along with these records, can substantiate your R&D Tax Credit claim.
How to claim the credit
Interested in claiming the R&D Tax Credit? It’s wise to consult with experts who specialize in this area. They can guide you through the process, help prepare the necessary documentation, assess qualifying expenses, and calculate your potential credit. Be aware that these specialists typically charge a fee based on the amount of your credit, but many will only charge if you actually qualify for the credit—so there’s no risk in exploring your options.
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.