Research & Experimentation Tax Credit
Are you taking advantage of all tax credits available to you? There is a credit that is often overlooked that could generate cash flow by reducing your income tax or payroll tax liabilities.
The Research & Experimentation (R & E) Tax Credit encourages and rewards domestic companies for creating new and improved products, processes, techniques, formulas, inventions, or software. The government rewards taxpayers by allowing a credit to offset some of the upfront wage and supply costs associated with research activities.
Who Can Claim the R & E Credit?
Any company in any industry could potentially qualify. The company is required to conduct activities that meet a four-part test:
- The research activity must be for a permitted purpose (and not just a cosmetic change) and must be for new OR improved products, processes, techniques, formulas, inventions, or software.
- The research must be technological in nature.
- The research must involve a process of experimentation.
- The research must aim at eliminating uncertainty regarding design, capability, or methodology.
Why Do Most Companies Believe They Do Not Qualify?
This credit is a hidden gem in most cases. Many companies believe they do not qualify when, in fact, they do. Some of the myths discouraging taxpayers from claiming this lucrative credit include:
- Myth #1: It is only for companies who invented something revolutionary.
- Myth #2: It is only for basic research.
- Myth #3: It is not available for companies that are profitable.
- Myth #4: It is only for big companies.
- Myth #5: It does not reduce state taxes.
- Myth #6: It is not applicable if the company’s research is government funded.
What Can SEK's Team of Advisors Do For You?
In the recent years, there have been clearer guidelines regarding this credit, allowing a larger variety of companies to apply. Some of the qualified industries include manufacturing, wineries and breweries, tool and die, pharmaceutical, agriculture, and software development. The manufacturing industry is the most common industry that would qualify, but don’t let that stop you from reaching out for a free consultation.
SEK’s team of advisors would assist in these areas:
- Assist clients in taking advantage of a lucrative tax credit by identifying activities that pass the four-part test to qualify as a research activity
- Identify qualifying expenses related to each activity
- Educate clients on how to identify activities that qualify
- Provide a study to support the calculation for the credit adhering to the required documentation set by the IRS
- Provide support in a case where the IRS would challenge the tax-payer thus creating an audit defense
- Provide consulting services on how the credit could be best utilized
- Perform a courtesy analysis on whether your company would qualify for the credit for any year within the statute of limitations
Tax Manager Angi Quigley discusses the lesser-known Research and Experimentation Tax Credit and how it can benefit your company.