If you own a business in the United States, it may qualify for the R&D tax credit.
When preparing your company’s tax return this year, don’t join the thousands of businesses nationwide that are leaving money on the table. Your business may qualify for the R&D tax credit.
What is the R&D tax credit? It’s a dollar-for-dollar incentive for U.S.-based businesses that innovate. If your company makes a unique product, you’ve likely done the research and development activities needed to qualify – regardless of the company’s size, industry or profitability. It’s not about employing scientists in white lab coats, but rather the innovation and experimentation that most business owners do to differentiate their products and services. Many kinds of activities qualify as R&D across both technical and non-technical roles and expenses, including manufacturing and production processes.
The reasons most businesses miss out on this money are simple enough: Tax jargon is intimidating, and many business owners have never heard of the R&D tax credit. In fact, 80% of the eligible businesses we work with that qualify had never heard of it. Companies looking to qualify for the R&D tax credit must pass the four-part test as laid out by the IRS. R&D activities must:
- Be technological in nature. This is the most basic foundation of the test. To qualify, an activity must rely on hard science or engineering – including anything from physics, chemistry or biology to electrical engineering, computer science or machine learning. People often think R&D only relates to products, but it can also apply to processes. For example, a company that uses science to make a shipping process more efficient or safe could qualify.
- Eliminate uncertainty. This means a company is solving a complex, challenging technical problem. The problem must require a specific person’s or team’s expertise to solve; it cannot be routine maintenance or an easy fix. For example, IT teams frequently handle computer crashes and software upgrades. While these are technical issues, they don’t qualify because they are routine and involve no uncertainty. The team knows exactly what steps to take to solve them.
In contrast, a manufacturing company that tests different equipment to make its production process as fast and efficient as possible might qualify because they are addressing a complex problem with no known solution.
- Involve a process of experimentation. This is one of the most important aspects of the four-part test, and relates directly to eliminating uncertainty. Experimentation is where “R&D” comes in: when a team experiments with possible solutions to solve a technical problem. In this process, a team will determine what success and failure look like. If they fail to solve the problem, they’ll ask why and try again.
- Have a permitted purpose, or provide new or improved functionality, performance, reliability or quality for a business component. A business component can be many things: a product, process, technology or formula, for example, that relates to the product or service a business offers. To qualify for this step, a company must set a goal to significantly improve a component or make a brand new one. For example, an organization could set a goal for its software to handle ten times its current traffic volume.
These examples show that many businesses are already doing things that meet IRS guidelines for the R&D tax credit.
Early-stage companies can use federal R&D dollars to offset up to $250,000 in payroll taxes across five separate taxable years, or carry them forward as an asset on their balance sheets until they’re utilized. Mature companies with gross receipts over $5M or five years of sales history could offset income taxes with R&D credits.
Want to know if you qualify for R&D tax credits? Just answer a few simple questions to see if you’re set to pass the four-part test:
- Did you improve the products you sell, the service you provide, or the process by which you deliver either, in the last year?
- Did you have to work around technological challenges or limitations while making or improving your products or processes?
- Did you employ some technology, engineering, or other hard science to address your technological challenge?
- Did you explore multiple solutions before you made your final choice?
Congratulations! Based on your answers to the questions provided, we think you might be eligible for R&D tax credits. An Ardius specialist is available to discuss your business’ expenses and potential tax benefit and start the process with you.