Other companies are aware of the R&D tax credit, but fail to take full advantage due to misconceptions about the types of research and development activities that qualify. The fact is that a broad range of common practices in many industries will qualify for the credit under the Internal Revenue Code's definition of R&D.
If your company operates in manufacturing, agriculture, construction, and many other industries, there is a strong chance that you would benefit from an R&D tax credit study.
The Opportunity
- A hidden and immediate source of cash for many small and mid-size companies.
- Creates a significant reduction to current and future years federal and state tax liabilities.
- The R&D tax credit is not a deduction; it is an actual dollar-for-dollar credit against taxes owed or taxes paid. Additionally, the taxpayer may be able to expense all such qualifying R&D costs in the year incurred.
- More than $7.5 billion in federal R&D tax credit benefits alone are given out annually.
- Approximately 80% goes to a few of the nation's largest companies.
- Every successful company is potentially eligible for an R&D tax credit of some amount.
- A business can take the credit for all open tax years, generally the last three or four years plus the current year.
- Additional years may be available if taxpayer is in a net operating loss or alternative minimum tax position.
- Tax credits may carry forward 20 years.
- Recent tax laws are taxpayer-friendly and bring additional benefits.
- In addition to the federal R&D tax credit, many states offer a state R&D tax credit as well.
What Qualifies as R&D?
We have found many of our clients regard their own efforts to make new, lighter, stronger, cheaper, more reliable products, or to make more precise, more economical, and more versatile processes as “just doing my job,” when in fact they have been performing R&D qualifying activities all along.
If your company is involved in any of the following activities, you may be able to claim the R&D tax credit:
- Developing an innovative product that is new to the market
- Engineering and designing a new product
- Research aimed at discovering new knowledge
- Searching for ways to apply new research findings
- Designing product alternatives
- Evaluating product alternatives
- Significant modifications to the concept or design of a product
- Designing, constructing, and testing preproduction prototypes and models
- Engineering activity to advance the product's design to the point of manufacture
- Systems processing modeling
- System and functional requirements analysis
- Integration analysis
- Experimenting with new technologies
- Experimenting with new material and integrating the material to improve manufactured products
- Engineering to evaluate new or improved specification/modifications in terms of performance, reliability, quality, and durability
- Developing new production processes during prototyping and preproduction phases
- Research aimed to significantly cut a product's time-to-market
- Research aimed to obtain more efficient designs
- Developing and modifying research methods / formulations / products
- Paying outside consultants / contractors to do any of the above activities
Why Should My Business Conduct An R&D Study Now?
The U.S. offers some of the world's richest R&D tax incentives, but chances are you're not taking advantage of them and getting the cash you deserve. As the pace of your business accelerates and competition increases, you may be more likely to overlook this source of cash because you lack the time, resources or expertise needed to identify and manage R&D tax credit claims.
Prior to December 2001, the requirements necessary to qualify for the R&D tax credit were rather difficult to obtain. However, in December 2001, the Bush administration issued IRS regulations which facilitated a company's ability to qualify for the R&D Tax Credit.
The new regulations are in harmony with the intent of Congress and are much more taxpayer-friendly. They reflect a profound change in the position of the IRS. The new regulations:
- Make it easier for a broader array of companies to qualify their activities as R&D
- Provide greater flexibility in certain recordkeeping requirements
Benefits Realized
The benefits our clients have realized as a result of having Elek & Noss CPAs conduct R&D tax credit studies for them are as follows:
- Realized millions of dollars of tax credits, resulting in cash back from the IRS
- Permanent tax savings and financial statement benefit
- Created a vehicle to realize additional tax savings in future years
- Increased the market value, earnings power and cash flows of their company
- Lowered the company's effective tax rate
