The research and development tax credit is often over looked by small to mid-sized businesses. Often these businesses are either unaware of the potential credit or believe their company doesn’t perform “high-tech” or “ground-breaking” research that would qualify for the credit. Some businesses even believe the calculation of the credit is too complicated to pursue the credit or the cost-benefitto calculate the credit is not great enough to pursue the credit .
In recent years though, the IRS has simplified the calculation of the credit which has made it more attractive to small and mid-sized businesses. This means the research and development tax credit is something that your business should re-examine.
What is the research and development credit?
The research and development credit (“R&D Credit”) is a federal tax credit for qualified research expenses conducted as part of a taxpayer’s trade or business.
What are qualified research expenses (“QRE”)?
QREs are expenses incurred that are directly associated with qualified research. These expenses include:
• Salaries
• Supplies
• Contract Research Expenses (with some limitations)
What is qualified research?
Qualified research is research undertaken that:
• Results in a new or improved process, function, product, performance, reliability, quality, or significant reduction of cost;
• Is undertaken to eliminate uncertainty of a new or existing product;
• Is based on principles of engineering, physics, biological science, or computer science;
• Involves the process of experimentation.
Most business are unaware that many research activities can qualify under these tests for the R&D credit. Potential examples of this would be as follows:
• A manufacture who produces a certain size of widget X is approach by a potential customer about producing a different size of widget Y. In order to determine whether the manufacturer can produce the widget Y, the manufacturer has to research and develop a new manufacturing process in order to handle the different size of widget Y. This research could potentially qualify for the R&D credit.
• A food manufacturer produces food product X. The food manufacturer would like to adjust the ingredients in food product X to make the product have a longer shelf life. The manufacturing undertakes research in order to determine the proper mix of new ingredients to increase shelf life of product X. This research could potential qualify for the R&D Credit.
These are just a couple of examples of what potentially could qualify for the R&D credit. If you have questions about the R&D credit please contact Eric Bell at Isler CPA.