Determining R&D Tax Credit: What Does it Entail, and What Can You Expect?

In the United States, recent changes have made it much easier for different companies to avail of research and development tax credits and incentives. But somehow, there has been a mistaken assumption that only big corporations and biotech and pharmaceutical firms can take advantage of determining R&D credits. The fact of the matter is that any firm, big or small, can benefit from research & development tax credits and incentives at the federal and state level. As long as they can prove that they have incurred expenses and have engaged in activities related to research and development, they can apply for credit.

Even public sector firms can benefit as well. As we know, public sector firms are those which provide a service to or outsource a product or service to the government. This can range from public transport companies supplying trains for the general public’s use to IT companies developing software and programs which government institutions can benefit from, and a host of others. There are also those which are classified as publicly owned companies which function for commercial profit but which also follow set criteria and operate under the standards and goals set by the government.

Determining if you are qualified for research & development tax credit

So if your enterprise can fall under the public sector, you can also take advantage of R&D tax credits if you have qualified research expenses. The next question is, how do you know what qualifies as R&D?

There is a simple four-part test for this which will tell you if the research that you have done or are doing qualifies. First of all, research that is done for a specific purpose may qualify for tax credit. Secondly, research that is done in order to eliminate uncertainty also qualifies. Thirdly, research that is done following a set experimentation process, and fourthly, research done that is technological in nature will also qualify for R&D tax credit. Once you have determined that your company’s R&D activities fall under this criteria, then you can proceed.

What does not qualify for research & development tax credit?

However, there are also certain research & development activities that do not qualify for tax credit. This would include research which is done after a product or service has already been commercially launched; research done after the production of a particular component; research done in order to duplicate an existing component of the business; and reverse engineering, among others.

Determining R&D expenses which qualify for tax credit

In the course of your R&D activities, it is only natural that your enterprise will incur expenses related to this. These expenses which may be eligible for tax credit include the salaries you pay for employees conducting research in-house; the purchase of supplies that include tangible property (but not land); contracts for research done by a third party/parties; and other basic payments related to research.

The next step is determining the calculation of the credit you can expect to receive. While this may be a bit more complicated, you can always seek advice and assistance today from R&D tax specialists like Swanson Reed, which has a wealth of knowledge and experience in all matters related to R&D tax credits and incentives in the US.