The Research and Development (R&D) Tax Credit is a government-sponsored tax incentive that rewards companies for conducting research and development within the United States. These tax credits benefit both small and large corporations alike and are available to a wide variety of industries in the applied sciences field and other technical research areas. 

Read on to learn more about the R&D Tax Credit and determine if this could be the right direction for your company! 

What Benefits Can R&D Tax Credit Bring to Your Company

The main objective of the R&D Tax Credit is to grant funding so that companies can promote internal innovation, thus helping the overall economy. It is an excellent way for businesses of all sizes to obtain capital while stimulating research activities dedicated to improving their products and services. 

The R&D Tax Credit aims to: 

• Increase a company’s market value and cash flow.
• Lower a business’ effective tax rate.
• Reduce federal and state tax liabilities.
• Allow companies to keep more of their profits. 

How to Understand That You Can Claim The R&D Tax Credit?

Nowadays, most companies conducting product testing, employing engineers, engaging in data science and analysis, or outsourcing product research are eligible to claim the credit. However, please take into account that you will have to present a component of hard science in the research to meet the incentive’s requirements. We advise you to keep detailed records of your business expenses to help prove that you qualify for the incentive.

What Eligibility Criteria Are Followed for R&D Tax Credits

In order to determine eligibility for the R&D tax credit, a four-step, IRS-enforced test is followed to ensure all required parts are met. Here are the criteria:

• Permitted purpose: the activity must be intended to develop or improve a product, process, software, technique, formula, or invention. The goal should be to improve functionality, performance, reliability, or quality.
• Elimination of uncertainty: the activity must aim to eliminate uncertainty about the development or improvement of the business component. This means you’re trying to figure out if you can develop it, how to develop it, or determine the appropriate design.
• Process of experimentation: The activity must involve a process of evaluating alternatives. This could include modeling, simulation, systematic trial and error, or other methods to overcome technological uncertainties.
• Technological in nature: The process of experimentation must rely on principles of physical or biological sciences, engineering, or computer science. This emphasizes that the research should be scientific or technical in nature.

The size of your company or the business sector doesn’t matter. The R&D tax credit is for every company that improves its business somehow; it can be processes, products or services. The government rewards 10% of all expenses that companies conduct in activities considered as innovation, research or development at a federal level and might be increased at a state level.

What costs qualify for R&D tax credits?

There are several types of costs you can expect to qualify for R&D tax credits. Here is a list of the main categories:

1. Wages: salaries and wages for employees directly performing, supervising, or supporting qualified research activities.
2. Supplies: materials used in the R&D process, excluding capital items or general administrative supplies.
3. Contract research: Payments to third parties for performing qualified research activities (only 65% of these costs typically qualify).
4. Computer rental or cloud computing: Costs for renting computers or cloud services used directly in R&D activities.
5. Basic research payments: Amounts paid to qualified educational institutions or scientific research organizations.

It’s important to note that these costs must be directly related to the qualified research activities and meet the four-part test we discussed earlier.

What Information Do You Need To Present To Apply

As with any other grant application, the more documentation you present relating to your research and development activities, the higher your chances of obtaining the credit will be. Some of the most important documents you should always keep nearby are: 

• Copies of contracts and invoices paid to any third-party researchers. 
• Timekeeping records of work plans, meetings, and other activities that can prove you are conducting R&D projects. 
• Payroll information of employees directly involved in R&D. 
• A list of business expenses and supplies of both necessities related to R&D and those that are not.
• Blueprints, progress reports, marketing materials, test records, and any other information that can prove the evolution and impact of your R&D project. 

Does Your Company Qualify for R&D Tax Credit? Find Out Today!

FI Group USA is committed to supporting innovative companies of all sizes in their research and development ventures. If you have recently invested in new products or processes and would like to know if you are eligible for R&D tax credits or refunds,  we are the place for you. 

Contact us today to tell us more about your project; we look forward to collaborating with you!