What is the R&D Tax Credit and How Can You Claim It?

You’ve probably heard that millions of dollars in income tax credits go unclaimed every year. Did you know that many businesses are also missing out on beneficial tax credits?

This is especially true of small businesses that don’t have an accounting professional on staff.

As you’re getting ready to file your taxes for the year, it’s important to make sure you’re taking advantage of every tax credit available to your business. This includes the Research and Development, or R&D, tax credit.

Read on to learn more about the R&D tax credit and what you need to do to claim it for your business.

What is the R&D Tax Credit?

The Research and Development tax credit is a tax credit available to businesses that have been working on developing new products or processes.

There’s a misconception out there that the R&D tax credit is only available to large corporations that have research labs attached to them. This definitely isn’t the case, though.

Any business that has spent time, money, or resources working on improving their products and processes may qualify for this tax credit.

You don’t have to be working toward curing cancer to benefit from the R&D credit. You just have to be making efforts to make your company better.

Even companies like Boeing and Mattel have been able to make us of the R&D credit. There’s a good chance your company can do the same.

You can browse this post if you want to learn more about the R&D credit and how different companies make use of it.

How to Qualify for the R&D Tax Credit

Okay, at this point, you’re probably interested in claiming the R&D tax credit for your business.

There are a lot of businesses that can benefit from the R&D tax credit, but there are some very specific steps you need to follow in order to claim it.

Make sure you’re abiding by these guidelines in order to claim the credit without having to worry about getting in trouble with the IRS later:

Pass the Four-Part Test

The first step to claiming the R&D tax credit is to pass the IRS’s four-part test. This test is comprised of the following elements:

  • Eliminate Uncertainty: This shows that you’ve taken steps to eliminate uncertainty around product or process development or improvement.
  • Process of Experimentation: You need to show that you’ve participated in aspects of the experimentation process, such as simulations or hypothesis testing.
  • Technological in Nature: Your activities need to be based on scientific or engineering principles.
  • Permitted Purposes: You need to show that some kind of improvement was made, such as in the product or process’s performance, reliability, or overall quality.

If you can say that your business’s activities met these criteria, you likely qualify for the R&D tax credit.

Know Which Expenses Qualify

Next, you need to understand which business expenses qualify and can be written off using the R&D tax credit.

Some common qualifying expenses include:

  • Salaries for the people who worked directly work on the innovation, as well as first-line managers who oversaw it.
  • Legal fees for things like patents
  • Contractor fees for U.S.-based contractors

You can also use the R&D tax credit to write off the cost of supplies used to work on your research and development projects.

Gather Appropriate Documentation

In order to claim the R&D tax credit, you need to make sure you have appropriate documentation readily available. Some of the documents you’ll need to have at the ready include:

  • Payroll records
  • Project lists
  • Project notes
  • General ledger expense detail
  • Lab results
  • Emails and other documents pertaining to the project

It’s also helpful if you can combine these documents with credible employee testimonies verifying that they were working on the project.

Claim Missed Opportunities

Don’t forget that you can also claim missed opportunities from past open tax years.

If you find that past projects align with the IRS’s four-part test, it might be a good idea to go back and gather documentation that allows you to claim the credit from previous years.

You might be able to write off expenses from the past three or four years — why wouldn’t you try to take advantage of that?

Common R&D Tax Credit Mistakes

As you can see, the process of claiming the R&D tax credit isn’t as rigorous as you might think.

At the same time, though, there are mistakes that can cause you to miss out on your opportunity to claim it. Be sure to avoid these mistakes when filing your taxes:

Insufficient Documentation

If you don’t have proper documentation handy, it’s going to be hard for you to prove that you qualify for this tax credit. It’s especially important to have sufficient documentation at the ready if you’re going to try and claim the credit for past tax years.

Informal Documentation Process

An informal documentation process will make it much harder for you to gather the necessary documentation. Make sure you have a system in place now so that it’s easier for you to file taxes in the future.

Not Hiring an Accountant

Can you handle your business taxes on your own without the help of an accountant? Sure.

Should you, though? Probably not.

Hiring an accountant to help you prepare your taxes will make it easier for you to get the money back that you deserve. It’ll also eliminate a lot of stress during the filing process.

Learn More About Business Taxes Today

Nobody likes having to file taxes, but it’s a necessary evil for workers and business owners alike. If you have to file, you might as well save as much money as possible, right?

Now that you know more about the R&D tax credit, be sure to follow these guidelines so that you can claim it for your business and reduce your total tax bill.

Do you want to learn more about other tax credits your business can take advantage of when filing this year?

If so, we’ve got lots of articles that you ought to read. Start with this one on 11 steps that will help you decrease your tax bill.

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