The R&D tax credit allows companies to reduce their income tax liability in the current tax year, and receive a cash refund for taxes paid in the last three (3) years. If there is no income tax liability the credit can be carried forward for up to 20 years. Many states have implemented their own version of the R&D Credit, and qualifying companies can claim both!
The R&D tax credit was created by congress in 1981 during the Reagan administration and expanded and made permanent in 2015.
Originally, the program was limited in its scope and was only available for particular manufacturing businesses. In addition it was time consuming and challenging to execute. Since then, the program has made great strides and now includes almost any business type as long as they are meeting the requirements and the four part test, and has become a significantly easier process for the business owner. The time our clients spend on this process is around three hours.
If your company is: creating or improving new products, services or modifying existing processes there's a good chance you are performing R&D and may be eligible to claim R&D tax credit.
Do You Qualify for R&D Tax Credits?
Most businesses that perform activities which meet the following four part test may qualify for R&D tax credit; regardless of the industry, revenue, or size of the company.
Qualified purpose: Creating a new or improved product or process that results in increased performance, quality, function, or reliability (computer software included).
Technical uncertainty: An activity performed to eliminate technical uncertainty about the development or improvement of a product or process. There has to be an elimination of risk, potential failure or loss by undergoing the project or activity.
Process of experimentation: activities undertaken to eliminate or resolve a technical uncertainty, which involve an evaluation of alternative solutions or approaches and is performed through modeling, simulation, systematic trial and error, or other methods.
Technical in nature: The process of experimentation relying on hard science, such as computer science, engineering, physical, chemistry, or biology.
You are able to claim on the amounts paid for: Salaries, Supplies, Contract research, Computer leasing and more.
Salaries paid to employees who conduct qualified activities, as well as to first-line managers and personnel who directly support these individuals, can qualify.
These salaries are generally one of the largest components in an R&D tax credit claim, but they may differ by industry. For example, the most prominent expense for pharmaceutical and construction companies is often contract research.
A portion of payments made to U.S. based contractors, as well as any supplies consumed in the R&D process are also eligible.
Standing Behind Our Work
With recent changes to the legislation, documentation has become a critical element of the R&D credit initiative.
Our tax team at Leyton will work with our clients to evaluate all activities for potential eligibility, identify qualifying expenses and produce documentation to support and justify these costs.
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