Research and Development Credits
The research and development tax credit (commonly referred to as the R&D Tax Credit) practice conducts retroactive studies, current year engagements, and risk advisory services. Our professionals combine an understanding of tax law with engineering disciplines to maximize companies’ research credits and reduce their overall tax burdens. Your organization will be provided documentation to withstand the highest level of IRS and state tax authority scrutiny.
What is the Research and Development Tax Credit (R&D Tax Credit)?
The R&D tax credit was enacted by Congress to keep U.S. businesses competitive in the global market and prevent job outsourcing. The PATH Act of 2015 made this credit permanent. Any business, regardless of size, that develops products or processes, including software, likely has R&D tax credits. There is a federal tax benefit between 4.5% and 6.5% per dollar of Qualified Research Expenditures (QREs).
R&D Tax Study Finds $133,064 in state and federal R&D tax credits for Contract Food Manufacturer
LBMC partnered with McGuire Sponsel to perform an R&D Tax Credit study for a contract manufacturer that specializes in developing new and improved formulations and manufacturing processes for the food industry. Our team identified $2,205,106 of Qualified Research Expenses (QREs) for tax year 2016. The resulting benefit earned $133,065 in total tax credits.
Benefits of the R&D Tax Credit
- Businesses with average gross receipts of $50 million or less for the prior three years can apply the credit to Alternative Minimum Tax liabilities.
- Eligible startups can use the credit to offset payroll withholding taxes. Startups using the provision must have gross receipts of less than $5 million and no gross receipts prior to the five taxable years ending in the then-current tax year. The credit towards payroll withholding taxes is limited to $250,000 in one year, but companies can carry forward excess credits to apply to future payroll withholding taxes.
Expenses eligible for the federal credit include wages, supplies, contract research and basic research payments to qualified non-profit organizations and institutions. While there are several ways to calculate the credit, the Alternative Simplified Credit base amount is 14 percent of qualified expenses that exceed a calculated base amount.
Does your company qualify for the research and development tax credit?
In determining whether your business research activities qualify for the Research & Development Tax Credit, the activities must pass the four-part test:
- The goal must be to discover some technological information that does not already exist
- There must be a level of uncertainty related to the product or process development
- Any costs must be directly attributable to what the IRS calls a “process of experimentation,” with no assurance of success
- The research must have a general business purpose
LBMC’s experts will aim to maximize research credits while providing defendable and conservative claims to the IRS. Contact us today to discuss what opportunities you have available.
CHECKLIST: Do You Qualify for the R&D Tax Credit?
Many taxpayers tend to regard Research and Development (R&D) tax credits as an activity associated solely with high tech, biotechnology, and manufacturing companies, when in fact, many other day-to-day company operations qualify.
The purpose of R&D tax credits is to reward companies for investments in developing new or improved products, processes, or techniques; developing new technology, and developing and improving production/manufacturing processes.
Take a look at our checklist to gain insight into your business situation.
Types of R&D Tax Credits
Qualifying R&D need not result from a formal planned process. It can be one of three types:
- Classic R&D: Conducted based on a planned decision to develop new, or improved, products or services, and typically conducted by an R&D department or team
- Contingent R&D: A project that begins without certainty about how to complete it, and started because existing expertise is lacking to fill an order
- Unplanned R&D: Arising from a sudden discovery that existing technology is insufficient during the filling of an order, resulting in unplanned development
Industry Specific Tax Credit Studies
A broad range of business activities qualify for R&D tax credits in various states as well as under the Internal Revenue Code. If your company operates in any of the following industries, you may benefit from an R&D tax credit study:
- Apparel and Textiles
- Building System Control
- Civil Engineering
- Dairy Farming
- Distilled Spirits
- Electrical Contracting
- Electrical Engineering
- Environmental Engineering
- Feed Mills
- Firearms & Ammunition
- Food & Consumer Packaged Goods
- Furniture & Cabinet Manufacturing
- General Contracting
- Job Shops
- Life Sciences
- Mechanical Contracting
- Mechanical Engineering
- Medical Equipment Manufacturer
- Oil & Gas
- Plastics Injection Molding
- Product Engineering
- Shipbuilding / Marine
- Structural Engineering
- Waste Management
CASE STUDY: R&D Tax Credit for Healthcare Technology
This success story reviews a software/technology company located in Nashville, Tennessee that reached out to our team for an R&D Tax Credit Study. The Technology platform connects patients with affordable, quality healthcare. The company had annual revenue of $18 million in 2018 and employs 146 people, 42 of which were included in the study.
Our team of R&D consultants was engaged initially in 2018 to conduct an R&D Tax Credit Study for the company for the first time. We put a focus on education about the credit and conducted detailed interviews with key personnel, so the client was able to claim a significant credit year after year. As a result of our continued engagement, our process has become more efficient. For new studies, our team performs all fieldwork and documentation gathering via email correspondence and conference calls since key personnel were already educated on all necessary items to provide. This improvement has allowed for a more streamlined approach to conducting studies and saves time and money for the client.
- $1.2 million in qualified research expenses (QREs)
- $78 thousand total effective federal credits
View the entire case study here.
Indications of an R&D Tax Credit Opportunity
- Do you employee engineers, scientists, project supervisors, or programmers?
- Do you develop or improve products or processes?
- Do you incur raw material costs during the product development process?
- Do you build prototypes, jigs, models or dyes?
Since 2014, McGuire Sponsel and LBMC have partnered to provide first-class service with integrity that brings value to LBMC’s clients. As a national specialty tax consulting firm, McGuire Sponsel offers Research & Development Tax Credits, Fixed Asset Services including Cost Segregation, Global Business Services and Credit and Incentive Services. Contact us for more information and to get started.
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