Does your company design, develop, or improve products and processes? If it does, the federal research and development (R&D) tax credit may be an option to consider that could generate great tax savings!
Whether you are businesses such as construction, engineering, manufacturing, agricultural production, , or wine making, for example, you may be doing some form of qualified research and development (R&D). The R&D tax credit was designed to encourage new business innovations that lead to company growth and stimulate the economy.
A common misperception is that the research needs to create something “new to the world.” That is not true as you just need to produce something (or create a process) that “is new to you.” Another misperception is that the research needs to be done for your own business. On the contrary, engineers and contractors can take the credit for research work done on a construction project.
Congress has passed laws to improve the criteria so more businesses are able to take advantage of the R&D tax credit.
The two most recent changes are (1) small business start-ups have the option to offset the credit towards payroll tax liabilities and (2) Congress has eliminated the alternative minimum tax (AMT) restrictions (the credit did not previously offset AMT tax liability). The expenses that qualify for the credit are research wages, supplies, and contract research. To qualify as a research activity, it first needs to be new to the business and not just a change to a current product or process. Second, the research must have been performed to answer an uncertainty. The credit is then offset against federal income tax liability, or for start-up businesses, the credit offsets payroll tax liabilities.
For example, an engineering firm discovered qualified R&D expenses of $910,000 in 2016 that produced a net federal R&D tax credit of $60,000. This is a dollar for dollar offset against the individual income tax for those shareholders!
As are all tax related topics, there is a great deal to learn as well as options to consider for each business. There are specific requirements to meet in order to qualify for the R&D tax credit. Contact your KTLLP CPA to discuss the possibility of qualifying for the R&D credit to ensure you are not missing out on this great opportunity.