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Maximize Your First R&D Tax Credit Claim by Amending Prior Years’ Returns

Mar 22, 2019

3 year rule

If you’re still wondering whether the R&D Tax Credit is worth your time, consider this. You may be able to maximize the value of your first R&D Tax Credit claim by amending returns from prior years to claim similar credits.

If you identify activities that qualify for the credit, you can amend your returns going back three years from your filing date. So, while every year of applying for the R&D Tax Credit can save your organization tens to hundreds of thousands of dollars – or maybe even more – amending prior returns can push your first years’ ROI even higher.

Amending Returns for Up to 3 Years

Another way to think about this is like a statute of limitations. In general terms, your company has up to three years to amend prior returns to take advantage of the R&D Tax Credit.  That’s why it’s vital to start considering your options now before the window closes on getting the full tax benefit your business deserves.

At the state level, your company may be able to amend tax returns going back even more than three years (California, for example, allows for four years). Consult an R&D Tax expert for the rules in your state.

Considering Past Qualifying Activities

If your organization hasn’t applied for the R&D Tax Credit before, it’s important to realize that many of your standard processes you take for granted may qualify as research and development. For manufacturers, they can be found in any of the nine steps of the standard manufacturing process. These steps are:

  1. Sales Time
  2. Design Meetings
  3. Flat Blank Layouts
  4. Tool Making
  5. Engineering Process
  6. Proof of Concept
  7. Trial Production Run
  8. Quality Approval
  9. Shipping

Once you’ve identified activities that may qualify, run them through The Four-Part Test to determine whether or not they meet the standards for the R&D Tax Credit.

The Four-Part Test

Once you’ve identified potential qualifying activities, run it through the four-part test to verify. The four parts of the test are:

  • Permitted Purpose. This is the activity intended to make or improve either a product or process that results in improved function, performance, reliability, quality or cost efficiency.
  • Technical Uncertainty. This is the activity intended to eliminate technical uncertainty when developing or improving a product or process related to methodology, design, techniques, formulas or inventions.
  • Process of Experimentation. This is the activity that includes a process of experimentation to eliminate or resolve technical uncertainty. During the process, various alternatives and approaches are evaluated by modeling, simulation, trial and error, prototyping and other methods.
  • Technological in Nature. The process of experimentation must rely on the hard sciences (engineering, physics, biology, chemistry, computer science).

Preparing for the R&D Tax Credit

Regardless of your company’s current tax liability, it’s important to rely on experts so that qualifying activities can be accurately accounted for. Since the nuances of the R&D Tax Credit are complex, it's important to consult an R&D Tax Credit expert with experience in your industry to determine how your business might qualify for the R&D Tax Credit.

Watch our 4-minute video on how we saved one client enough to buy a huge piece  of game-changing machinery with the R&D Tax Credit