How to make the most of your R&D Tax Credit Claim
A Research and Development (R&D) credit claim could be your company’s passport to reduced tax liability – and it’s all thanks to one rather underused tax incentive. In specific, the R&D tax credit. This is one of the most bounteous tax incentives and can assist companies in generating generous tax savings. For example, in 2012 alone the IRS estimates that $10.8 billion in federal tax credits were claimed. Considering that this evaluation does not include credits claimed by S-Corps or LLCs or the amount of R&D credits claimed at the state level, the amount of total R&D credits claimed for 2012 is presumably much higher than reported.
However, R&D tax credits are frequently unheeded by entrepreneurs and small businesses, who presume they must have on-site laboratories or breakthrough ‘white-lab coat’ research to claim the credits. Comparatively, others distress that they will face complex tax calculations or that it will trigger an IRS audit. However, many small businesses can claim the R&D tax credit. Moreover, with the changes to the permanency of the R&D tax credit and the PATH Act, the credit is now more easily available to smaller companies and start-ups.
However, despite the evidence that the R&D tax credit is a valuable incentive, its administration has been complicated by uncertainty from companies in a number of areas. Most notably, confusion usually surrounds what constitutes as qualified research expenses and the required manner of documenting and substantiating those expenses. Since we’ve previously discussed what qualifies as research expenses in our latest video tutorial, we will focus on the documentation generally required.
This is particularly important as many companies either understate and/or under-document their credits, consequently losing some or all of them on examination. Thus, how does a company go about properly documenting its R&D expenses?
To begin with, documentation should be assembled while a firm is undertaking the research, even in cases when there is no formal R&D plan yet. Individuals will want to keep all the diagrams constructed and all the schematics. Moreover, time sheets for anyone doing research should be documented with notes on what they are working on and when. This is particularly vital as firms can apply employee’s’ wages towards the credit claim. However, the company must document that 80 percent of the employee’s activities was qualified research and development. Therefore, if an employee performs qualified R&D services at least 80 percent of the time, then 100 percent of his Form W-2 wages are eligible for the R&D tax credit.
As the New Year begins, it is the perfect time of year for companies to consider how to progress their companies forward in the future. Undeniably, R&D expedites innovation through developing or creating products, processes and systems. However, as can be seen from above, there can be confusion when making a tax claim based on R&D activities. Hence, how can companies avoid errors when making a claim?
One way of escaping error is by engaging in a reputable R&D Tax Specialist, such as Swanson Reed. Our specialists can identify and readily scope out the correct value of your claim. If you should be claiming, an R&D Tax specialist will help you write the technical justification, advise you on what does and doesn’t qualify, clarify what costs should be included and support any questions you may have. If you would like any more information on the R&D Tax Credit, please contact us today to find out more.
