You don’t have to wear a white coat and work in a lab to qualify for R&D tax credits.
“Many companies have misconceptions about what is necessary to qualify for and substantiate an R&D credit,” says Carolyn Driscoll, JD, LLM, a senior manager for R&D tax services at Moss Adams LLP.
“The tax definition of R&D is broad and can apply to a multitude of companies.”
In addition, many companies already have systems in place to document their R&D efforts and claim the credit.
“Your meeting minutes, test plans and results, and project tracking systems are good platforms to document the R&D tax credit,” Driscoll says. “Everyday business practices may already be supporting and documenting your R&D efforts.”
Smart Business spoke with Driscoll about state and federal R&D tax credits and how they can help your company realize significant cost savings.
What is the tax definition of R&D?
To be eligible for the credit, your R&D expenses must meet each of the following criteria:
■ The purpose of the research must to be to create a new or improved product or process resulting in increased performance, function, reliability or quality.
■ The activities must rely on the hard sciences, such as engineering, physics, chemistry, biology or computer science.
■ Technical uncertainty must be encountered at the outset of the project.
■ An iterative process of experimentation must be performed to resolve the technical uncertainty described above.
What is the current status of the federal R&D tax credit?
The Tax Increase Prevention Act of 2014 (TIPA), which was signed into law on Dec. 19, 2014, extends (among other items) the R&D tax credit, which had expired on Dec. 31, 2013. The renewed credit contains the same provisions as its earlier incarnation and now covers the period from Jan. 1, 2014, through Dec. 31, 2014. For companies already using the credit, the renewal provides an extension for 2014. For companies that haven’t yet taken advantage of the credit, now may be a good time to explore potential savings for 2014 as well as up to three previous tax years.
How do you document your R&D efforts?
Create a project tracking mechanism.
Make sure your company’s general ledger allows for categorization of specific development activities.
If you’re using third-party contractors, be sure to retain the contract or invoice that details the activities the contractor is undertaking. Take notes at meetings, and make sure everyone present is listed.
That’s an easy way to document not only the activities that are occurring, but also the individuals participating in the development efforts. The key is to develop a system that memorializes the process.
Documentation is a critical component in supporting credit claims, and because it is such a lucrative opportunity, it’s often highly scrutinized by taxing authorities.
If your company is implementing or planning to implement an enterprise resource planning system, that’s a good time to say, ‘OK, let’s add this level of granularity here to make sure we’re tracking our R&D costs.’
The key is to leverage what you are already doing as a starting point to support and document your qualifying work.
How much can you save through R&D tax credits?
The benefit can be significant.
When the federal credit is combined with the California credit, the savings can amount to around 10 cents on every qualified dollar spent.
So if you spend $1 million on qualifying research, you can receive $100,000 in the form of the credit.
The first step is to talk to a specialist — either a CPA or an R&D tax credit specialist — to see if your company performs work that may qualify. ●