One of the Most Lucrative Tax Credits Available
In a temporary effort to boost the economy in 1981, the federal government sought to use the passage of the research and experimentation tax credit to reward businesses for investing in research.
With the rapid changes in technology in the past decades, companies across multiple industries have seen increasing challenges to constantly innovate their products or processes to compete across a global economy.
Changing the Path
Recognizing the need to create jobs domestically and maintain global economic competitiveness, congress has extended the R&D tax credits more than a dozen times over subsequent years, finally making them permanent with the passage of the PATH Act of 2015. In addition to becoming permanent, the Protecting Americans from Tax Hikes Act expanded R&D credit provisions to start-ups and small businesses.
The R&D tax credit is now available to any U.S. business that spends time and resources on new development, improvements, or technological advancements in effort to improve upon its products or processes. The credit can also be available to American Business owners that have improved upon the performance, functionality, reliability or quality of existing products or trade processes.
The PATH ACT is now a permanent fixture of the United States tax code, and one of the most lucrative credits available to businesses of all sizes and industries.
The R&D tax credit may apply to any taxpayer that incurs expenses for performing Qualified Research Activities (QRA) on U.S. soil.
The credit is a percentage of qualified research expenses (QRE) above base amount established by the IRS in a four-part test.
1. Elimination of Uncertainty
2. Process of Experimentation
3. Technological in Nature
4. Qualified Purpose
QUALIFIED RESEARCH ACTIVITIES
- Developing or designing new products, processes, or formulas
- Developing a new manufacturing process
- Developing prototypes or models
- Developing internal software solutions
- Developing or improving software technologies
- Testing new materials or concepts
- Streamlining internal processes
- Maintaining laboratory equipment
- Documenting research activities
- Designing or evaluating product alternatives
- Certification testing
- Environmental testing
About the R&D Tax Credit
Section 41 of the Internal Revenue Code lays out the rules and regulations surrounding the R&D tax credit.
Many misconceptions surrounding the new regulations are that it is difficult to apply for the credits and that it is restricted to a small group of industries. This could not be further from the truth.
The goal of the PATH act is to encourage innovation in businesses across the United States. The U.S. tax court and states alike have ruled in favor of business activities that make jobs faster and more efficient. This could be anybody from a contractor who uses new materials to create green, energy efficient improvements, to a manufacturer improving production processes through investment in new technology.
Expanding the Tax Benefit
As of January 1, 2016 Eligible Small Businesses (ESBs) can use the credit to offset the Alternative Minimum Tax (AMT).
An ESB can be a non-publicly traded corporation, partnership, or sole proprietorship with annual revenues under $50 million for the three tax years prior to the current year and credits can be retroactively captured subject to special rules under section 448(c)(3).
More companies than ever are able to take advantage of the R&D tax credit because of the AMT (Alternative Minimum Tax) which is a simplified method used to compute Research and Development tax credits. Companies using the ASC computation may be able to claim a credit even if they do not qualify for the traditional tax credit claims.
How much have you overpaid?
The biggest reason for small businesses not taking advantage of the R&D tax credit is self-censoring. Prior to the PATH act, the traditional method of calculating and filing for the credit was a process that was not worth the effort for small business owners and their tax advisors alike. Now, thanks to the new broadened terms and calculation methods, along with the ability to lookback 3 years and amend returns, business owners are putting substantial dollars back into their business.
By going through the Business Qualification Process with your consultant and by providing our CPAs with pertinent tax filing information in accordance with your business structure we can conduct a feasibility study free of charge to see if your business qualifies.
Interested in learning more? Contact Allan today!
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