The research and development (R&D) tax incentive is one of the most lucrative credits the Internal revenue Code provides, but it’s commonly overlooked. What constitutes as “research and development” is more expansive than one might think and may include activities your company already performs daily.
What is the research and development tax incentive?
R&D tax credits are government sponsored tax incentives that reward businesses for conducting research and development in the United States. The 2015 PATH Act permanently extended and expanded the provisions of the R&D tax credit, making it even more valuable. Yet the R&D tax incentive is woefully underused by small and medium sized businesses. Many business owners who don’t perform traditional research functions don’t believe the credit applies to them, or that the cost of a tax specialist might outweigh the benefits. But they’re leaving a whole lot of money on the table.
Big companies are taking full advantage of the research and development tax incentive. For example, Amazon paid the IRS $0 in 2018 and plans to do so again this year, partly due to the R&D credit.
Who qualifies for the credit?
The R&D tax credit isn’t just for companies inventing new products. Businesses making improvements to processes, products, patents, techniques, formulas and software applications can also benefit from the R&D tax incentive.
The Internal Revenue Service has a four-part test to determine qualifying research activities:
1. Qualified purpose. The activity must be undertaken with the purpose of developing or enhancing a product or process’ quality, functionality, reliability, cost-efficiency or performance.
2. Technical in nature. The process of experimentation must rely on hard sciences such as physics, engineering, biology, chemistry or computer science.
3. Technical uncertainty. The activity must be performed to eliminate a technical uncertainty about the improvement or development of a process or product, which includes computer software, formulas, techniques and inventions.
4. Process of experimentation. The activities must include a process of experimentation taken to resolve or eliminate a technical uncertainty. This includes evaluating alternative approaches or solutions through simulation, modeling, systematic trial and error, or other methods.
While business owners in many industries can take advantage of the research and development tax incentive, some sectors are more likely to perform qualified research activities. These include, but are not limited, to:
- Government Contracting
- Transportation & Logistics
- Waste Management
- Biotech/life Sciences
- Oil & Gas Refineries
We can help.
There are some gray areas about what constitutes a qualified business research activity. If you have questions about the research and development tax incentive, please contact us today. Our Certified Public Accountants and advisers can help make sure you’re taking full advantage of every tax savings opportunity available.
Author: Megan O’Donnell