Manufacturing Business and R&D Eligibility

Research and Development (R&D) Tax Credit, also known as Research and Experimentation Tax Credit, is over 30 years old but is still one of the least understood and most-renewed (it has never been made permanent) parts of the US tax code system. Throughout its many renewals different rules and regulations have been added and taken away, making it difficult to understand for business owners. Companies operating in the manufacturing business working with electronics, improvements in fabrication, developments in software components for industry, and other areas can be eligible for research and development tax credit. Here’s how the system works and how you can find out whether your research and development activity qualifies.

Exclusions to the Credit

Qualified research is applied to certain activities only, and there are many types of research that are not applicable to the tax credit scheme. For example, adapting or duplicating research into an existing business component is not included, and research into a product that takes place after it has gone into commercial production is not valid. Research into the fields of arts or humanities is also excluded, as is research or development activity that is already subject to a grant or funded by a government group. Market research is excluded, as is routine product testing. Software developments for use solely in the claimant’s own company are also excluded.

Tax Credit Eligibility

In order for your manufacturing research and development to be eligible for the tax credits it needs to fulfill broadly four important considerations. The first is the research must be of a technological nature – arts and humanities are out. It must be based in biology, physical science, computer science, or engineering. The purpose of the research should also be to improve or enhance the functionality or the performance of a product or a technique. You should be eliminating uncertainty with your research, and the process should involve a process of experimentation.

Eligible Expenses

You can use the tax credit eligibility to offset the cost of wages for those involved in the qualified research activities. Alongside wages you can also claim the cost of supplies, any research activities that are contracted out to other parties (in California), and payments for basic research.

Professional Advice

There are several ways you can calculate tax credit – some are more complicated than others. If you are using the traditional method, for example, it is best if you have some advice and assistance from a tax professional.

If you are confused about eligibility requirements and what your research needs to encompass in order to be part of the qualifying package, consult a tax professional like Swanson Reed. It can often be difficult to decide if research and development activities are eligible, and businesses are not keen to begin a claim without being 100 percent sure. For this reason, a consultation is helpful and can clear up any questions or concerns.

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