The Research and Development (R&D) Tax Credit promotes innovation and spurs job growth. It is a boon to companies in numerous industries, providing cash for reinvestment and reducing tax liabilities, now and in the future. Companies that invest in the development or improvement of products or processes can claim the R&D Tax Credit.
Still, many companies are missing this opportunity because the R&D Tax Credit is complex and difficult to claim. The process requires substantial legwork and a considerable amount of documentation and support to secure any amount of credit. Many companies simply lack the time and tools needed to pursue the Credit.
InnovaTax helps companies determine whether their activities qualify for the R&D Tax Credit and guides them through the complex steps of calculating and claiming the Credit. Our approach to engaging clients is straightforward and unique. Driven by our experience, expertise, and a focus on data analysis, we minimize disruptions to our clients’ operations while maximizing the benefit to which they are entitled.
Features of the R&D Tax Credit
The R&D Tax Credit Is . . .
Originally enacted in the early 1980s, the federal R&D Tax Credit has seen many changes over the years. Today, the R&D Tax Credit is a permanent part of the U.S. Tax Code, and it continues to incentivize innovation.
The R&D Tax Credit is available to a wide variety of businesses in differing industries. Companies that create or improve products, processes, formulas, or software can claim the Credit. Even startups and small businesses may qualify for this significant tax benefit.
Tax credits are the most potent tax tools because, unlike tax deductions or exemptions, they reduce the amount of taxes due, dollar for dollar. The R&D Tax Credit can reduce federal taxes up to 9.1%, and up to 50% in some states.
R&D Tax Credits do not just impact the current year, they can be carried back one year and forward twenty.
The R&D Tax Credit is attainable by many innovative companies because there is a relatively low threshold for expenses and activities to qualify. A company’s research expenses qualify when they go toward the wages, contractors, and supplies needed for innovation. A company’s research activities qualify when they meet all the criteria set forth by the IRS in its Four-Part Test.
Criteria for Qualifying for the R&D Tax Credit
The Four-Part Test:
- Part 1 — Do Activities Eliminate Uncertainty?
Activities must focus on the discovery of information that eliminates uncertainty regarding the improvement or development of a product or process.
- Part 2 — Do Activities Rely on Hard Sciences?
Activities must rely on the principles of engineering, computer science, or the physical or biological sciences.
- Part 3 — Are Activities Designated for a Permitted Purpose?
Activities must relate to the development of a new or improved product or process, also known as a business component. Business components must be designated for a permitted purpose, such as to increase reliability, functionality, performance, or quality.
- Part 4 — Do Activities Involve Experimentation?
Activities must incorporate the process of experimentation in which alternatives are evaluated through modeling, simulation, testing, and trial-and-error methodology.
Many companies qualify for the R&D Tax Credit without knowing it. InnovaTax helps companies capture this significant opportunity—quickly and accurately.
About R&D Tax Credit Service Providers
What to Look For:
When it comes to experience, quality is more important than quantity. A team that has only 10 years of experience but has a diverse mix of attorneys, CPAs, outside industry experts, and specialists from Big 4 accounting firms will have broader knowledge than a more homogeneous team with 15+ years of experience.
Good providers are prepared to defend their work and have a good track record with audits. Exceptional providers include this service at no additional cost. Beware of providers who outsource audit defense because they do not have attorneys or CPAs authorized to act before federal and state taxing authorities, or because they lack resources and know-how. Audit defense has and always will be included in InnovaTax engagements—at no additional cost.
Exceptional service providers have the skills and technical resources needed to handle the lion’s share of work associated with the R&D Tax Credit process. If clients must slow operations and burden key personnel to do the work themselves, they will be left wondering exactly what it is they paid their service provider to do.
Low-Risk Rate Structure
R&D Tax Credit service providers should offer free preliminary assessments. Clients should not expect to pay a penny until they have been shown that they qualify for the Credit and to what extent they qualify.
Committed service providers take the R&D Tax Credit seriously. There are risks involved in claiming the Credit. Providers should be forthright about tax legislation and forthcoming with advice. Above all, they should deliver what they promise.