For years the Research and Development tax credit has been offered to businesses in order to offset expenses that arose from, you guessed it, research and development. Since 1981 the tax credit was a temporary credit that had to be renewed year after year. Now however, the R & D tax credit has become a permanent part of the Protection Against Tax Hikes Act, or better known and easier to remember, the PATH Bill.
You have the chance to recoup up to 20% of what you spend in R & D with either the Traditional Credit Calculation, the Start-Up Credit Calculation or 14% with the Alternative Simplified Credit.
This is not just for large corporations. The R & D tax credit can be applied to all different types of businesses. Any business that is investing time and money into improving their products, creating new products or processes can qualify for the Research and Development Credit.
Innovation is a key ingredient to a successful business. It gives you a competitive edge, provides the public with a better products or services and contributes to the economy. Eligible expenses include wages, supplies, contract research and basic research.
Employee wages are the largest expense for most businesses, and wages of an employee either working directly on an R&D project or directly supervising or supporting an R&D project can be offset by the Research and Development Credit. There are two different ways of documenting these wages. The first is the Project approach. This documentation uses the company’s time tracking documentation to link an employee’s wages to the specific Research and Development project. The second is the Departmental Approach, which relies on testimony, job descriptions, educational background and other information that helps provide an accurate time estimate.
Supplies can include any property that is not land, improvements to land or property that is likely to depreciate. The expense must relate directly to the R&D project. Contract research done by a third party as well as research done in-house can be covered by the Research and Development tax credit. Contract research is considered at 65% of the expense and your business must own the rights to the research.
A lot of the expenses that go into innovation can help you get the Research and Development tax credit. You don’t have to be a large company, or have a department strictly dedicated to creating prototypes. The important thing to remember is that there is a good amount of documenting that goes into getting this tax credit and it’s important to understand the expectations and limitations.
In order for you to have a truly strong grasp on the R&D tax credit, please stay tuned for our next post where we will cover how the three different credits work and which one is best for you. Learn about the Sales Tax Services from Heartland Accounting.