In the US 93% of businesses overpay their taxes! This includes 70% of businesses that qualify for the federal Research and Development Credit (R&D Credit) and never claim it.
Here at Quartermaster Tax, we have made it our business to help you keep as much of your money as possible by getting businesses lesser known tax credits and deductions.
One of our favorites is the R&D Credit, which can supercharge your cash flow, cut down your Federal tax bill, and provide dollar-for-dollar income tax reductions at both the Federal and State levels. But before you jump into claiming it using IRS Form 6765, let’s demystify the key aspects you need to understand.
What is a Qualified Research Activity (QRA)?
A Qualified Research Activity, or QRA, is a specific project aimed at developing new products, improving existing ones, or crafting innovative software and fabrication processes. To determine if your research activities qualify for the R&D Tax Credit, the IRS has laid out a Four-Part Test. Here’s what you need to know:
– Business Component Test: Your activity should enhance the performance, quality, reliability, or function of a business component. This component could be anything from products and processes to software and inventions that your company uses.
– Technological Uncertainty Test: Your work should tackle uncertainty. This means dealing with things you didn’t know when you started, like whether your desired results were achievable, the exact means to reach those results, or the best design for your project.
– Process-of-Experimentation Test: Most of your work must involve experimenting with different approaches to achieve your goal. This is crucial when the method or capability is uncertain at the outset.
– Technological-in-Nature Test: Your research should have a technological aspect. If your experiments rely on principles from physical or biological sciences, engineering, or computer science, you’re on the right track.
Examples of Eligible Research Activities
Curious to know if your business activities fit the R&D Tax Credit criteria? Here’s a snapshot of activities that typically make the cut:
– Creating better products, processes, software, or techniques.
– Streamlining internal manufacturing processes.
– Designing tools, jigs, fixtures, and molds.
– Incorporating new equipment.
– Developing data center tools and delving into big data and data mining.
– Merging APIs and other technologies.
– Crafting financial or pricing models.
– Collaborating with external consultants for specific projects.
– Manufacturing improved or entirely new products.
– Bringing prototypes, first articles, and models to life.
– Exploring alternative materials.
– Creating firmware.
– Developing and optimizing network hardware and software.
– Designing simulators.
– Building risk management systems.
Keep in mind that activities like training, customer service support, payroll management, style or cosmetic design research, conference attendance, and management studies typically don’t qualify as R&D activities.
Expenses That Qualify as Research Activities
Expenses linked to your qualified research activities can also be considered for the R&D Tax Credit. These expenses include:
– Employee compensation.
– Costs for materials.
– Expenses related to contracted services.
To back up these expenses, you may need to provide payroll records, financial documentation, vendor invoices, and records of contract research expenses.
Seek Professional Guidance
Identifying which activities and expenses meet the R&D Tax Credit criteria can be a bit of a puzzle. To ensure you maximize your potential tax savings, it’s wise to consult with professional R&D tax advisors who can steer you in the right direction and provide expert support.
In conclusion, the R&D Tax Credit is an exciting opportunity for businesses immersed in research and development to reduce their tax burden and boost their financial well-being. Don’t let potential savings slip through the cracks. Reevaluate your R&D endeavors today, and consider tapping into expert advice to make the most of this tax credit. Your business could stand to gain significantly, no matter your industry.