Tax Strategies with Drew Miles — Research & Development Credit
Drew Miles is back again to help you get the most out of your taxes. We don’t want any of your hard-earned cash going down the drain. Drew Miles has been providing tax saving benefits to hard working Americans for over twenty years. Today, we’re taking a look at research and development credit.
What is Research and Development Credit?
The R&D Tax Credit was put in place in 1981, and it is one of the most valuable tax credits to be leveraged by companies. Essentially, the tax credit yields billions of federal and state benefits to companies who engage in qualifying research and development. To put it simply, the government-sponsored benefit gives a cash incentive to companies conducting research in the United States.
The credit is generally given to companies that participate in the following types of research, but this is not a comprehensive list:
Manufacturing & Fabrication
Aerospace & Defense
Tool & Die Casting
Chemical & Formula
Percentage of Income Attributable to R & D as Defined by the IRS
There is an R&D tax credit up to 13.5 cents for every qualified dollar of qualifying expenses. In addition, there is a dollar for dollar reduction in your federal and state income tax liability.
The following are what the IRS considers as qualifying activities:
· Developing new, improved, or more reliable products, processes, and formulas;
· Developing prototypes and models;
· Developing and applying for patents;
· Conducting testing of new concepts and technology;
· Developing and improving manufacturing processes;
· Developing, implementing, or upgrading software systems;
· Improving or building new manufacturing facilities; and
· Expending resources on outside consultants to assist in any of the above activities.
The following are NOT ELIGIBLE for the research and development credit:
· Research conducted after the beginning of commercial production;
· Research adapting an existing product or process to a customer’s needs;
· Duplication of an existing product or process;
· Surveys or studies;
· Research relating to certain internal-use computer software;
· Research conducted outside the United States, Puerto Rico, or a U.S. possession;
· Research in the social sciences, arts, or humanities; and
· Research funded by another person (or governmental entity).
For companies eligible to claim the tax credit, the credit is primarily calculated in one of two ways, the Regular Research Credit or the Alternative Simplified Credit.
Regular Research Credit
The Regular Research Credit is 20% of the excess of a company’s “qualified research” expenditures, including both in-house research expenses (including wages) and contract research expenses, for the taxable year over a base amount, and 20% of the company’s basic research payments that exceed a base amount.
Alternative Simplified Credit
The Alternative Simplified Credit provides a 6% credit for Qualified Research Expenditures for the first three years that the credit is taken. This also creates the baseline needed for subsequent years. Once the baseline has been created, the R&D Credit is 14% of the current year Qualified Research Expenditures more than 50% of the average Qualified Research Expenditures for the previous three years (the baseline period).