What to Do with R&D Tax Credits

by Josh Biggs in Finance on 21st June 2021

If there is one thing that is constant in this world, it would be taxed. For whatever income an individual has, there will surely be a certain percentage that will be considered as taxable. Businesses are no different, most federal and state tax liabilities heavily come from local business enterprises. It is therefore important to find tax credit resources that can be used to offset the expenses incurred by the company or see a reduction in the amount of taxes to be paid to the government. R&D tax credits were created to provide relief for businesses who have invested in research and development activities to keep their products, services, and processes relevant, updated, and more efficient. The tax credits allow businesses to realize cash savings when they devote resources to research and development. It is a very beneficial credit that can help all businesses of all sizes to gain more funds by reducing the amount of taxes due to the government. On the other hand, not many business owners know about this incentive and there are fewer of those who file claims for the credit. Most businesses think that research and development pertain only to those who have dedicated laboratories and scientists for developing new products, in truth, the qualifying tests for the R&D tax credit are more elaborate and inclusive, it’s just that not many know about it. So instead of paying more federal and state taxes, you can take advantage of R&D tax credit by making an application to claim your credit. The process is not that difficult but you do need the help of experts to facilitate your claims application. This should not be an issue as there are firms who specialize in the said tax credit and they will help you through the whole process for a reasonable fee. 

Do You Qualify For R&D Tax Credits? 

               Suffice it to say that for the most part, not many business owners are aware of the R&D tax credits, much less the four-qualification tests that will help determine whether you indeed have qualified research and development activities and expenses. Knowing which activities and processes that your company does regularly can qualify as research and development activities is the first step in the claims process. The second one is to identify the R&D expenses that your company incurs to finance R&D activities. The most common R&D activities that can qualify for the tax credit can be the following but are not limited to creating improved products, techniques, formulas, processes, and software; automating manufacturing processes. Designing tools, fixtures, and molds, integrating new equipment, using data mining tools, making use of data for strategic decision-making, integration of new technologies, development of financial models, hiring consultants for R&D activities and projects, developing new products and prototypes, use of alternative materials, optimization of network hardware and software, developing and using simulators. Thus, any business across different industries and of any size from start-ups to big corporations can apply for R&D tax credits. The second aspect of the qualification process is that there should be evidence of research and development expenses, that the company regularly uses its operational funds to pay for the R&D activities. The evidence to include in support of qualified research and development expenses can be any of the following: employee payroll records, financial documents showing the purchase of supplies and payment of contracting consultants and other R&D projects, and even vendor invoices of the same activities. The estimate of how much tax credit the company will qualify for depends on the research and development activities and expenses that the company has in a given year. The more the company spends on R&D activities, the higher the tax credit estimate will be. 

How To Apply For R&D Tax Credits?

               Applying for R&D tax credits begins with identifying the company’s qualified research and development activities and expenses, however, since most companies are not sure of exactly what activities and expenses can be claimed as tax credits it is best to hire a firm to help you with this. Several firms specialize in R&D tax credits and hiring one of them will ensure that you can file a claim and realize savings from it. The firm will prepare a feasibility analysis in which a team of expert evaluators will look into your day-to-day operations and review your processes and systems and then identify the R&D activities and expenses you have. From the results of the feasibility analyses, the firm will be able to provide you with an estimate of the R&D tax credit you may be qualified for, at the same time, the firm will also present to the company its proposal and fees and if you agree to it, then an agreement will be signed and the firm will continue with the fieldwork and credit calculation. The second phase of the tax credit process is for the firm to send their experts to gather information, conduct client interviews, analyze the qualified research and development activities and expenses and compute the federal and state credits of the company. The team will also collect the necessary documents needed to prepare the report for the audit. The last phase of the firm’s work will be to provide the company with the needed support for the IRS audit defense and the state audit defense. After which, it is guaranteed that the company will be able to see results in terms of the tax credits that the company can claim during the timely filing of tax returns and amended tax returns.  

Do You Need R&D Tax Credits?

               At present when businesses are just coming off from the closures and lockdowns because of the pandemic, sales and profits have also suffered. Hence, whatever way in which a company can save money or gain tax credits will be welcomed. However, if you feel that applying for the R&D tax credits would be too much work or too costly for your company at the moment, then you can postpone the whole qualification and feasibility analysis process until the next year. The R&D tax credits can be claimed even three years back and then forward. 

Categories: Finance