Companies who might qualify for the R&D tax credits claim should not let their potential tax incentives go unclaimed.
They should not be intimidated by the thought of the R&D tax credits documentary requirements.
Various qualifying activities can be established across diverse industries.
Companies who are willing to take a look could uncover funding that is not dilutive to reinvest in the business and propel innovative activities with the savings from the R&D tax credits claims.
Through R&D tax credits claims, a company has the responsibility to ensure that tax documentations are in order.
Depending on the state, the laws and regulations require strict payment, and non-compliance penalties can be severe.
There are times when a company files for an R&D tax credits claim only to find wanting in creating a proper nexus between their expenses and research and development projects. Thorough documentation is the solution to this R&D tax credits claim issue.
Since 1981, the federal R&D tax credits have been around. But it was not through the PATH Act of 2015 that it was made permanent in the United States.
By this time as well, the legislation has opened the path for small businesses that were not profitable enough to benefit from it.
Additionally, even more, companies were aided to benefit from their research and development activities because of the new offsets made for the alternative minimum tax and payroll tax.
Large companies, in general, take up a large chunk of the overall research activities performed and the highest R&D tax credits claims in dollars each year.
Still, it can be important to note that the R&D tax credits incentive is not just for these large companies with established R&D divisions.
Remember, any business or entity that develops products, processes, or software whether new or improved can qualify for the R&D tax credits claims under the US tax code.
And it does not even matter if the developments were a success or not.
How R&D Tax Credits Can Be Monetized
The incentive from the R&D tax credits claim can be used to balance or offset the following:
- Income taxes when an entity is in a taxable position
- AMT or alternative minimum tax if an entity has an average annual gross of $50 million or lesser for the prior three (3) years, and still owing AMT in the current year
- The employer portion of the Social Security taxes of up to $250,000 for each fiscal year for qualified small businesses or enterprises. Regardless of profitability, qualified small businesses are allowed to get a benefit for their R&D activities.
How to Know if Qualified for the R&D Tax Credits
Qualifying for an R&D tax credits incentive does not depend on the industry, size, or profits of a business as long as the entity does activities that meet the four tests.
Here are the four tests to qualify for an R&D tax credit:
- Qualified purpose: the purpose of a project to qualify for R&D tax credits needs to be related to producing a new or improved component of an existing business.
- Essentially technological: the work for it to qualify for R&D tax credits needs to rely on principles of either physical, biological, or computer science or engineering.
- Uncertainty elimination: when the qualifying project work has begun, there would have been uncertainty about the capability to generate the product or enhancement, the methodology to be used, or even the correct design of the product.
- Experimentation process: the project that would qualify for R&D tax credits must involve a process by which the entity tests alternatives and resolves the uncertainty referred to above.
What Expenses Qualify for the R&D Tax Credits Claims
Taxable wages for personnel performing R&D-qualified activities or employees directly supervising and supporting this qualified personnel should meet the requirement.
Payment shares for US-based contractors can also qualify.
Additionally, supplies used in eligible R&D activities, contract research, computer leasing, and cloud-based facilities can all be qualified for R&D tax credit claim applications.
For cloud-based providers, their activities that relate to R&D activities like cloud development or testing may qualify portion of payments.
Up to 10% of the eligible spending can be attributed to the federal tax credit.
Apart from this, a lot of states have developed their R&D tax credits incentivization and have varying incentive percentages.
Some of these R&D tax credit schemes resemble that of the federal government adopting the qualifiable types of activities and expenditures.
What Documentation is Needed for the R&D Tax Credits Claims
First and foremost, businesses should assess all of their activities for potential eligibility. After, they should start tracking their expenses and gathering documentation.
Documentation of activities and expenses is an integral part of protecting the company in case of an audit.
Documentation for an R&D tax credits claim must be done right for the company to prevent penalties and limit liability as well.
Remember that proper documentation validates the supposedly qualified expenditures claimed in the R&D tax credits claim. For it does so, documents need:
- To be dated to prove that the activities have occurred in the fiscal year of the R&D tax credits claimed
- To emphasize technical challenges to justify that the qualified R&D activities were done
The documentation for R&D tax credits claims can include timesheets, prototypes, all technical documents with version controls, developer notebooks, minutes of meetings, test documents, e-mails, whiteboard photos, invoices, receipts, and contract agreements detailing the scope of works.
What is Needed to File for the R&D Tax Credits Claim
The R&D tax credits claim has to be submitted with the company’s filing of the annual corporate tax.
Here are the necessary documents that should go with R&D tax credits claims:
- Credit for Increasing Research Activities (Form 6765)
- General Business Credit (Form 3800) – This form has a blank that asks for the amount of “Credit for Increasing Research Activities”
- State-required forms for their state R&D tax credits scheme
- Employer’s Quarterly Federal Tax Return (Form 941) – this is if the company qualifies for the payroll tax offset, thus they should make sure to account for it in this form
- All other documentary requirements stated in I.R.C. § 41
Companies who want to do R&D tax credits claims right the first time often hire R&D tax specialist firms to help them and assist in strategizing their way to optimize the benefits of this claim.