How to maximize your R&D claims (and recover up to $250K of your spend)

The US research & experimentation tax credit (or R&D tax credit) is a general business tax credit under IRS section 41 for any business that incurs research and development (R&D) costs in the United States. Each year under this program, the US government provides over $10 billion to businesses for developing new or improving existing technologies, products and materials.

Established first in 1981, the R&D tax credit experienced fluctuating status for decades, with Congress periodically renewing it after it expired. Finally in 2015, the R&D credit was signed into permanent law, so US businesses with R&D costs can now confidently account for it in their long-term budgeting forecasts.

In our recent webinar, we chatted with R&D tax credit expert and Boast Capital co-Founder, Chief Strategy Officer, and EVP Lloyed Lobo on the details of the R&D tax credit, and how exactly businesses can optimize their claim, and ultimately use the credits to offset payroll taxes up to $250K per year, to offset AMT, or to reduce income taxes.

Read on to learn more (and find the entirety of our discussion with Lloyed here):

Who can claim?

Though the idea of a “traditional” R&D company typically evokes those in the scientific, professional, and technical services sectors, in actuality these types of company only accounted for about a third of all claims filed in 2013 (the most recent year of available IRS data). In 2013, a substantial amount of companies in the following sectors (in order of significance) also filed claims:

  • Manufacturing
  • Wholesale and retail trade
  • Management of companies (holding companies)
  • Construction
  • Administrative support and waste management services
  • “Various services,” which includes educational services; health care and social assistance; arts, entertainment, and recreation; accommodation and food services, and more
  • Finance and insurance
  • Agriculture, forestry, fishing, and hunting

At the end of the day, any company in any sector can qualify for the R&D tax credit if they can prove they perform R&D activities.

How do I qualify?

Regardless of the industry, size, or revenue of your business, to determine your eligibility for the R&D tax credit, you need to ask yourself these 5 questions

  1. Was there a scientific or technological uncertainty that could not be removed by standard practice/engineering?
  2. Did the effort involve formulating a hypothesis specifically aimed at reducing or eliminating the aforementioned uncertainty?
  3. Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypothesis?
  4. Did the process result in a scientific or technological advancement?
  5. Was a record kept of the hypothesis test and results as the work progressed?

The IRS specifies that any R&D activities should be technological in nature (hard sciences, such as engineering, physics, chemistry, biology, or computer science) and involve technical uncertainty, a process of experimentation, and a qualified purpose.

Want more detail straight from the horse’s mouth? Hear the full discussion with R&D expert Lloyed Lobo in our Maximizing Your U.S. R&D Claims webinar.

What can I claim and recover?

In general, you can claim the salaries of employees in the US, materials consumed in R&D, and US subcontractors costs.

The amount you can recover is fairly substantial, as outlined below:

Federal:
  • 6% of eligible expenditures, or
  • 14% of half of the average R&D expenditures over the past three years (if expenditures remain constant over a three years period, this method results in a 10% credit)
State:
  • This differs by state, but
  • For businesses in California, you can claim 15% of eligible expenditures over the past three years

How can I use my tax credits?

There are a few options to utilize your recovered costs; you can:

  • Reduce federal or state taxes owning, which you can carry back 1 year, or apply in the current year, or carry forward 20 years
  • Apply the credits toward FICA payroll tax liability of $250,000 per year if you are either pre-revenue or you had less than $5 million in gross receipts for the tax year with no gross receipts for more than 5 years from the tax year
  • Apply the credits against the Alternative Minimum Tax (AMT)

Note: The ability to use tax credit toward payroll tax and AMT was implemented on January 1, 2016, so it can’t be applied before this date.

How do I optimize my claim?

The best way to optimize your claim and ensure your passing of an R&D tax review is to emphasize consistent technical documentation that:

  • Includes dates,
  • Is documented at the time the work was completed,
  • Highlights technical challenges, and
  • Captures any iterations undertaken to attempt to resolve said challenges

In general, you should be documenting all hypotheses and how they were tested — tracking hours worked by project and activity. When it comes to the IRS, the more accurate and detailed the information, the better.

 

 

*Note: The materials available at this website are for informational purposes only and not for the purpose of providing legal advice.

Regina Mullen
ABOUT THE AUTHOR
Regina Mullen
Regina is the Workforce Management Expert & Content Marketing Associate for Replicon. Replicon provides award-winning products that make it easy to manage your workforce. With complete solution sets for client billing, project costing, and time and attendance management, Replicon enables the capture, administration, and optimization of your most underutilized and important asset: time.
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