R&D Tax Credits – Everything You Need to Know “Give Your Business a Boost”
If your company is into research & development whether in software, biotech, aerospace or engineering, the R& D tax credit program can boost your business significantly. The program, in operation for over 30 years, is designed to help U.S. companies become more profitable. It has proven to be an important source of funding.
The R&D tax credit is a general business tax credit available to any company that incurs R&D costs in the United States. It is normally applied to income taxes in the current year (or carried forward to future years) but in certain cases, it can also be used to offset payroll taxes or the AMT. There is a federal R&D tax credit, and most states also offer their versions of the R&D tax credit. A company can claim the credit in its current year and can also go back and claim the previous three years.
To be eligible, a R&D project needs to be conducted in the US and needs to meet the criteria of the 4-Part Test: creation of a new or improved product, process or software, elimination of uncertainty, process of experimentation, and technological in nature. Note that if you are getting paid to conduct research or are receiving a SBIR-type grant, you need to retain the rights to the technology you are developing and you need to be paid on a Firm Fixed price type of contract.
There are a number of steps. First, you need to identify your projects that meet the IRS criteria for R&D. Second, you need to identify all your eligible R&D expenses associated with those R&D projects. The next step is to organize your technical and financial documentation to support the projects and expenses you are claiming. Finally, you need to fill out the Form 6765 (and choose the best credit calculation) and any state R&D forms and provide them to your CPA for filing with your tax returns.
Generally, R&D expenses fall under 3 main categories: wages, supplies, and contract research. Qualified wages are those that are directly engaged in qualified research, as well as directly supervising and supporting qualified research. Supplies are any materials rendered valueless during the process of experimentation, including prototypes and any lab and testing materials. Contract research are payments made to a third party to conduct qualified research where the taxpayer retains rights to the research.
Once you have identified your R&D projects and expenses, you need to fill out Form 6765 for your federal return. There are different methods to calculate the percentage amount that you get back, and the choice of method depends on a number of factors. Generally, the percentage return is at least 6%, but in most cases you can expect to get back around 10% of your expenses. In most states there are additional amounts available through state R&D tax credits and incentives.
If you are profitable and have paid your income taxes for the year, then yes you will get a cash refund from the IRS when you file your tax returns with a R&D claim. If you are not profitable but are a startup in your first 5 years of receipts and have sales of less than $5 million, then yes you will also get a cash refund. If you are amending any of the 3 previous years and paid taxes in those years, then yes you will receive a cash refund for those years. Otherwise it is a general business tax credit that can be carried forward up to 20 years.