R&D Tax Credit

R&D Tax CreditsThe Cost of Innovation

It’s a given that businesses must continually innovate to grow and be successful. For many businesses, innovation often involves the development of new or enhanced products, improving methods of production, or creating novel software solutions. These efforts, however, come with a hefty cost as well as significant financial risk. So what might a business do to quell the cost of innovation?

According to a popular study, less than 10 percent of America’s manufacturing and technology companies are aware of the federal and state research and development tax credits, and fewer still take advantage of the generous credit initiatives. The “R&D credit”, as it is commonly known, was established by Congress in 1981 as a temporary tax measure for the purpose of slowing the migration of manufacturing jobs to off-shore destinations and to improve the competitiveness of U.S. manufacturing companies in the global marketplace. Today, the R&D credit is a permanent provision within the federal tax code and the standard for the plethora of innovation credits offered by 38 states.

Who Qualifies for the R&D Tax Credit?

Any company undertaking development of new or improved products and fabrication processes as well as the creation of software are eligible to claim the R&D credit. Qualifying research activities typically involve the efforts of engineers, technicians, software developers, production workers, tooling makers, quality assurance personnel and a variety of others.

Eligible industries include, but are not limited to the following:

  • Manufacturing companies of all types
  • Life-science companies
  • Pharmaceutical companies
  • Architectural and engineering firms
  • Software development enterprises
  • Food and beverage producers

How is the R&D Tax Credit Determined?

The computation of the R&D credit is not altogether simple as the amount of the credit depends on qualifying research expenditures for one or more tax years, and there are two different calculation methods, the Regular Credit (RC) method and the Alternative Simplified Credit (ASC) method. The taxpayer is permitted to elect either of the two methods when preparing a timely filed federal return, but since each method has distinct advantages and disadvantages, it is particularly important to understand the two methodologies because the elected method cannot be changed after the original return is filed.

Why hasn’t my tax accountant claimed the R&D credit for my business in the past?

With exception of the largest CPA firms, most tax preparation firms are not staffed with engineers or personnel with sufficient technical expertise to recognize all the qualifying development activities and expenditures, plus have the ability to prepare the necessary substantiation documentation. To provide this valuable service for their clients, many CPA firms have come to depend on specialized R&D tax credit practitioners for their client’s needs.

First Beacon offers expertise and advisory services to innovation companies regarding federal and state R&D Tax Credits.

Contact us for more information on First Beacon’s R&D Tax Credit services.