4 Misconceptions About the Research and Development Tax Credit.
These 4 Misconceptions About the R&D Tax Credit May Surprise You
Although companies can potentially save hundreds of thousands of dollars while staying on top of the latest technological advancements, many don’t take advantage of the Research and Development Tax Credit because they don’t think they’re eligible.
Looking for R&D Tax Credit basics before jumping into misconceptions? Check out last week’s post to discover the answers to these burning questions:
- What is the R&D Tax Credit?
- Is the credit a federal or state credit?
- Is my company eligible
- Are these credits retroactive?
- Do FluidFormed products qualify
- Can I get the credit for purchasing a FormBalancer?
In this week’s installment, we’ll cover four common misconceptions about the R&D Tax Credit.
Often, companies choose not to claim the R&D credit because they’re either unaware of its existence or because the name of the credit “research and development” sounds limiting. In reality, the credit is pretty broad and relatively easy to claim.
“Businesses that fail to claim the R&D credit often do so because of confusion around documentation, qualifying activities and expenditures, and how the credit can be used.
Gaining clarity around these topics can provide the foundation for identifying and claiming the R&D credit—and lowering a company’s tax burden” (Moss Adams).
#1: My Business Doesn’t Pay Federal Income tax, So Why Would it Qualify For the Research and Development Tax Credit?
Small businesses and start-ups may be eligible for up to $250,000 for up to 5 years to offset the Federal Insurance Contributions Act (FICA) portion of payroll. An eligible company must have less than $5 million in gross receipts for the credit year and have no gross receipts or interest income dating back more than five years.
#2: We’re Not in the Research and Development Business
A rose by any other name would smell as sweet. In this case, the R&D Tax Credit is a sweet deal that a range of companies — not just those engaged in tech or life sciences — can qualify for the credit.
Here’s a four-part test to help you determine whether or not your business qualifies.
- Permitted purpose
The activity must be related to developing or improving the functionality, quality, reliability, or performance of a business component (i.e. product, process, software, technique, formula or invention).
- Technological in nature
The business component’s development must be based on a hard science, such as engineering, physics and chemistry, or the life, biological or computer sciences.
- Elimination of uncertainty
From the outset, the organization must have faced technological uncertainty when designing or developing the business component.
- Process of experimentation
The company must have evaluated multiple design alternatives or employed a systematic trial and error approach to overcome the technological uncertainties. (i.e. prototyping.)
#3: Our Employees Aren’t Degree-Holding Engineers or Scientists
It helps to have a lot of engineers and scientists on board, but it’s not essential. And third-party vendors or contractors who perform the research or prototyping may be included.
#4: It sounds great, but we’re not developing anything new
If you’re improving design or improving a product by using a new manufacturing process, you’re good to go. The credit is designed to reward American companies pursuing excellence and innovation. It doesn’t have to be new to the industry, it just needs to be new to you.
For more information about the research and development tax credit, precision hydroforming or purchasing new metal forming equipment for your company, call 1-800-497-3545 or email us at firstname.lastname@example.org.