What is the R&D Tax Credit?
Research and Development Tax Credits ( also known as R&D tax credits ) are often overlooked by entrepreneurs. The rules were issue in 1981 to excuse technological advances and the hiring of workers to perform R&D tax credit. The companies that receive the greatest dollar benefit of the R&D credit-80 percent. If the credit has already expired, that should not be especially alarming to business; It is expired 14 times, and then extended 13 times, often retroactively, over it is almost 30 year history. Like other presidents before him, President Obama has talked about expanding the benefits of the credit and even making it permanent.
If you are a starter and do not have any research expenses for the previous three years, you can use six percent of your adequate research amount to balance you tax liability, if you have any. If you do not have tax liability, it is because you do not have income as a starter.
Assess Your Research Activities to get an R&D Tax Credit
The first order of business when trying to figure out if your business qualifies for the R&D tax credit is to analyze the kind of work your company does. It does not matter if you are the smallest firms, you may still get the credit, as long as the research you is technological in nature and involves experimentation to develop new or improved products. You do not need to break the minimum for the firs time. If you have a product that has improved performance criteria, that’s a good sign says Anthony Mondoro, a partner at accounting firm Ernst & Young, who works with clients on federal tax planning. “ The IRS is not looking only for revolutionary, they are looking for evolutionary.”
Document Your Activities
You think you have found valid qualifying expenses? Good! However, since we are talking about R&D tax credit and the IRS, you better be capable to prove it. If you are a company that has not thought about the research credit in the past, because of the fact it is defined so broadly as new or improved products. Documentation is critical, emphasizes Kendall Fox, a tax partner who is co-leader of research tax credit. “ The burden of proof is on the taxpayer” he said. Companies that use project based accounting may have an easier time of matching qualifying activities to costs than those using cost-center based accounting. No matter what it is, it is a valuable exercise.
Some companies may want to consider surveying their researchers and developers to ask them about their activities this year, or even sitting down and talking to them about what sort of work they are doing, and what sort of records they have. Do you know what is important here? It is important to examine the nature of the activity, and what the scientists are doing to improve it. Fox says, “ If it involves experimentation, those activities need to be examined. If it involves a functional improvement to product or process, it may qualify for a R&D Tax Credit.”