It can be tempting to focus solely on driving growth when pursuing merger and acquisition opportunities. Conversely, how are you positioning your company for the best sale price? The answer to that could include the R&D Tax Credit.
Staying mindful of tax incentives like the R&D Tax Credit could help you improve a company's value. Have there been any qualified research expenses (QREs)? If so, has everything been appropriately vetted in order to prove they pass the Four-Part Test?
You should connect with a reputable R&D Tax Credit firm so they can advise you of the options related to the R&D Tax Credit. Doing so is a key part of an effective tax planning strategy. In the meantime, here are 3 items to consider when considering the R&D Tax Credit for your current or future business.
Taxes can complicate any merger or acquisition and cause headaches for buyers and sellers alike. Planning ahead, staying organized, and keeping R&D activities documented is key to successfully dealing with tax issues.
Buyers in a stock sale should include language in the purchase agreement that will secure their rights to unclaimed R&D Tax Credits. On the other hand, Sellers should try to retain unclaimed R&D Tax Credits by including purchase agreement language that retains their ownership for all unclaimed R&D Tax Credits (prior to acquisition date). Again, professional guidance is recommended in order to handle this complex tax issue. There may be areas of opportunities that can lead to significant financial savings and lessening the tax burden.
Importance of Documentation
Mergers and acquisitions can take a considerable amount of time and effort. While you’re handling the M&A portion of the process, your R&D Tax Credit partner should be collecting clear, accurate documentation related to qualified research activities.
Having the required documentation can make or break qualifying for a potentially large tax credit -- a credit that would likely help to increase the value of a company. On the other side of the coin, a seller that has everything properly organized and documented to claim the R&D Tax Credit might be able to include the projected benefit in its business value.
Understanding the R&D Tax Credit
If you are developing or improving a product or process, you likely qualify for the credit. Below are just a few examples of activities that may qualify for the credit:
- Developing new or improving existing production/manufacturing processes
- Developing formulations – drugs, food or chemicals
- Assisting customers with design or development
- Designing, evaluating or implementing equipment used in the production process
- Developing or applying for patents
- Designing tools, prototypes, molds or dies.
In order to qualify for the R&D Tax Credit, activities must pass each element of the law's Four-Part Test. Once they do, this is the basic formula to calculate the qualified research expense:
- (Percent of time employees spend on the activity) X (Their salary) =
Qualified Research Expense.
In a typical case, you will receive a 7% credit for all wages claimed as Qualified Research Expenses.
This does not include money paid for supplies and contractor research that also qualify for the R&D Tax Credit.
This formula is for general estimation purposes only. Be sure you consult with your tax R&D Tax professional for advice and information regarding the potential tax benefit of your credit.