What is the R&D Tax Credit?
To put it simply, the R&D Tax Credit is a tax incentive for U.S. companies to increase their research and development activities. Although the R&D is a Federal tax program, many states have chosen to include a state program as an additional incentive to its business owners.
In the marketplace, the Credit is known by three main names:
- R&D Credit
- Section 41 Credit
- Research Credit
The goal of a proper R&D Tax Credit study is to breakdown all applicable wages and costs incurred by a company and segregate those designated as Qualified Research Expenses (QRE’s). The tax credit to the company is a direct factor of the amount of eligible QRE’s.
Who generally qualifies for the R&D Tax Credit?
Companies with U.S. based operations that perform one or more of the following operations:
- New Product & Process Development
- Developing New Concepts or Technologies
- Design and Testing
- Prototyping or Modeling
- Software Development or Improvement
- Integration of new machinery
- Automation of internal processes
- Developing tools, molds, and/or dies
- Developing or applying for Patents
What kind of cash benefit can an R&D Tax Credit study yield?
On average, for every $1,000,000 in total company payroll, there would be a gross credit of approximately $20,000 to $40,000. Additionally, companies who have not yet taken the credit are eligible to capture missed credits from the prior three years.
For whom is the R&D Tax Credit available?
A company with U.S. based activities as listed above qualify for the R&D tax credit.
Are there different types of the R&D Credit?
The IRS allows two different methods of capturing the credit.
- Regular Research Credit (RRC)
This is the larger version of the Credit and requires more detailed documentation in order to satisfy the IRS R&D review board. According to the Journal of Accountancy, “The RRC is an incremental credit that equals 20% of a taxpayer’s current-year QRE’s that exceed a base amount, which is determined by applying the taxpayer’s historical percentage of gross receipts spent on QRE’s (the fixed-base percentage) to the four most recent years’ average gross receipts”.
If it sounds complicated, that is because it is. This is why companies need to hire an expert third party to handle all the intricacies of the Credit. The RRC is complicated but can yield substantial credits when completed properly.
- Alternative Simplified Credit (ASC)
While not necessarily simple, the ASC is simpler than the RRC; by a significant degree. Since 2007 business owners have been able to elect the ASC method and receive a slightly lower benefit when compared with the RRC (14% of QRE’s as compared to 20%).
The ASC is not available for prior tax year studies, as the election must be claimed on the original tax return. Companies will therefore frequently elect the ASC method for the current year R&D Credit study, and the RRC for prior years.
As a Blue Coast Advisor you will have access to a full team of R&D Tax Credit experts. This team includes Engineers and Attorneys who spend 100% of their time completing R&D Tax Credit studies for eligible companies across the nation.
History Of the R&D Tax Credit
The R&D Tax Credit is one of the most misunderstood and under-utilized credits, mostly due to the litany of changes it has undergone. Since 1981 there have been no fewer than eight expirations and fifteen extensions of the credit. Here is a brief overview of how we got where we are today:
1981 – The Economic Recovery Tax Act (ERTA)
The initial “stimulus package”, put in place to stimulate investment in research spending. Under the ERTA, the “Credit for Increasing Research Activities” was introduced. This was the initial R&D Tax Credit.
1986 – The Tax Reform Act of 1986
The first major set of revisions to the R&D Tax Credit was introduced, specifically as it related to defining “Qualified Research”. This would be the first of many revisions and updates.
2004 – Audit Techniques Guide Introduced
When it comes to a complicated, self-directed tax credit, the IRS needed to ensure companies were not taking advantage. In 2004, they introduced the Audit Techniques Guide to assist Auditors in their examinations. IRS examiners would now have a detailed guide on how to review R&D Tax Credit studies.
2005 – Revisions to the Audit Techniques Guide
In June of 2005, the IRS instituted a much more thorough guide to its examiners to assist them in their R&D Credit reviews.
2008 – Passing of the Emergency Economic Stabilization Act
This Act extended the Tax Credit for two years and increased the Alternative Simplified Credit (ASC) to 14% for tax years ending after Dec. 31, 2008.
2010 – Passing of the Small Business Jobs Act
This Act enhanced the ability of many businesses to capture the R&D Tax Credit by allowing the Credits to offset regular tax and the Alternative Minimum Tax (AMT). Unutilized credits can be carried back five years and carried forward twenty years without being subject to the AMT limitation. Prior to the Small Business Jobs Act, businesses paying AMT were essentially unable to utilize the benefits of R&D Tax Credits.
2012 – Passing of the American Taxpayer Relief Act
This Act retroactively reinstated the R&D Tax Credit, which had expired on Dec. 31, 2011.
2015 – Passing of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act)
This Act officially makes the Credit for Increasing Research Activities (The R&D Credit) permanent for the first time and contains several modifications. Small businesses are now eligible to use the R&D Credit against Alternative Minimum Tax (AMT). This means that many companies that previously had no utilization for the R&D Credit will suddenly find it available to them. In addition qualified small businesses will be allowed to elect to use the credit against payroll taxes.
The Blue Coast R&D Tax Credit Deliverable
- Fifty Page Final Engineering Report
- Completed 6765 IRS Tax Form
- Qualified Research Expenditure (QRE) Summary
- Detailed Overview of Qualified Client Processes
- Unlimited Audit Defense Certificate
- In-depth Engineering Analysis of Activities
- Substantive Pictures & Diagrams Substantiate Findings
- Applicable Case Law
- Unlimited CPA Consulting
Frequently Asked Questions by Prospective Clients
Why hasn’t my CPA already done this for me?
CPA’s are tax return specialists, not Engineers and Attorneys. CPA’s lack the proper expertise and experience in breaking down a company’s operations and processes in order to capture this extremely complicated tax incentive.
Do I have to amend tax returns to take advantage of the R&D Tax Credit?
For “current” tax years the R&D Tax Credit is captured by including IRS tax form 6765 into the current tax return. The credit to the business is a dollar-for-dollar reduction of taxes owed.
For “prior” years, also called “retro” years, the business will amend prior year tax returns in order to receive the credit. Note the statute of limitations on capturing prior year credits is three open tax years.
Will this study trigger an audit?
No. R&D audit reviews are handled by a separate authority and should never trigger a general business audit. There is a chance R&D Credits will be reviewed, which is why free “audit defense” is so important when choosing an R&D Tax Credit provider.
What if I get audited?
If the IRS chooses to review our R&D Tax Credit findings, we will defend our findings in front of the IRS at no cost to the client. We call this “100% Audit Defense”, which is inclusive in all of our studies.