Who should claim R & D Tax Credit ?

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Who Qualifies?

Every business that spends money for research and development for new products or services, or improves products, and services should utilize this tax credit to reduce their tax liability.

According to the IRS:  “The expenditures of Research and Development (R & D) are reasonable costs you incur in your trade or business for activities intended to provide information to help eliminate uncertainty about the development or improvement of a product. Uncertainty exists if the information available to you does not establish how to develop or improve a product or the appropriate design of a product.”

The Key Tests are:
  1. Is something being created or improved?
  2. Does the business bear the risk?  ( Risk means that they are not assured of payment or reimbursement by a customer or another entity for these efforts if they do not succeed in creating the product or improvement.)

What Qualifies?

  • Wages
  • Contract Services Payments
  • Expenses in Obtaining a Patent
  • Attorneys Fees
How much is the credit?

Generally the federal credit ends up being equal to 6.5% of the qualifying expenditures and the Pennsylvania credit can be 20% of the qualifying expenditures.

How are the Credits Used?

The federal credit is listed on the businesses tax return and then either used to offset taxes of either the business or the owners (depending on the type of entity).  A taxpayer must have tax in order to use the credit, in effect if they have no tax the credit will be carried forward 15 years into the future.  One downside of the credit is that it does not offset the Alternative Minimum Tax (AMT), meaning if a taxpayer is stuck in the AMT they will not benefit from the tax.

The expenses your business incurs for R & D are considered capital expenses and should be classified as an asset in your accounting software.

Are these Credits Audited?

The IRS does audit a high level of these credits.  Adequate substantiation needs to occur to insure a positive outcome in the occurance of an audit.

Not sure if your business qualifies for this substantial tax credit?