So, how do you know if you qualify for R&D Tax Credit?
Read here how one manufacturer was able to achieve $6K+ savings per hour invested in their study
For years, big businesses have received a substantial portion of the R&D tax credit dollars, but small and mid-size businesses deserve their fair share. After all, they represent more than 90% of businesses in the U.S.
Fortunately, in 2015, the federal government passed the Protecting Americans from Tax Hikes Act (PATH Act) allowing those small and mid-size businesses to more easily qualify for the credit. Now, every successful company is potentially eligible for the R&D Tax Credit. Depending on the business, even your day-to-day operations may qualify. It’s just a matter of having a total understanding of what is and isn’t allowed with this credit.
The R&D Tax Credit is a dollar-for-dollar reduction against taxes currently owed and previously paid. It is usually available for the current year and previous three years. However, a business can take the credit for any open tax year. Additional years may be available if the business is in a net operating loss or alternative minimum tax position. And federal tax credits can carry forward for twenty years.
Note: The R&D tax credit is not to be confused with the R&D Tax Deduction.
Contrary to popular belief, this is not limited to companies in the high-tech, biotech, and pharmaceutical sectors. The R&D Tax Credit can apply to a variety of industries including:
For years, the R&D Tax Credit was subject to periodic extensions, sometimes retroactive, which caused concern over its long-term viability. But that all changed in December 2015, when the Protecting Americans from Tax Hikes Act (PATH Act) made the tax credit permanent.
In addition to the permanency of the credit, it’s clear that additional incentives are encouraging companies of all sizes — particularly small business owners — to invest in improving their products and process to be more competitive globally.
Many common manufacturing activities actually qualify for R&D Tax Credit, so the question is whether or not your company does any of them.
Or does your company hire outside consultants/contractors to do any of these activities? If so, you may be eligible for this credit.
Ultimately, the work you do must pass the 4-Part Test in order to fully qualify for the R&D Tax Credit. The 4-Part Test includes:
When it comes to identifying R&D Tax Credit qualifying costs, there are three things you need to consider:
When determining whether your business qualifies for the R&D Tax Credit, it’s a good idea to seek professional help from someone who knows your industry and understands the law because it’s equally important to know what can and cannot be included in your reduction.