Find out why many companies are missing out on valuable tax savings
The R&D tax credit is one of the most complex businesses credits available to taxpayers. In fact, the IRS labeled it the most commonly reported “uncertain tax position” in 2010, 2011, 2012 and 2013. Because of these complexities, taxpayer (and even experienced CPAs) are often unsure about the qualifications necessary for claiming the R&D credit.
Here are five of the most common misconceptions we hear:
- R&D efforts must be revolutionary: Contrary to popular belief, R&D does not need to be revolutionary. In fact, IRS regulations specifically include any new or improved product or process improvement in their definition of R&D. So, even if you’ve been making the same product for 50 years, the work you’re doing to improve that product or to improve its manufacturability may qualify as R&D expenditures.
- The R&D credit is only available to manufacturers: While it’s true that manufacturers make up the bulk of businesses claiming the credit, the regulations do not exclude other industries. On the contrary, software companies creating new products as well as financial institutions developing internal use software are industry sectors that often claim the R&D credit.
- Only work performed by a degreed engineer will qualify for the credit: While it’s true that most manufacturers will have degreed engineers on staff performing R&D activity, it is not a requirement. IRS regulations clearly state that any individual who is directly engaging in qualifying activities, directly supervising qualifying activities or directly supporting qualifying activities may be eligible. Put simply, that means common tasks like managers supervising research personal, or a secretary typing up a lab report for a new prototype project may be counted toward total R&D expenses.
- R&D efforts must increase every year: While it’s true that year-over-year increases in R&D activities may provide a larger credit, businesses are not required to up their annual research activities. In fact, a new calculation method has been added by Congress to specifically to benefit businesses that are not increasing their annual R&D spend. So, even if your organizations R&D activities are decreasing, you may still be eligible for a credit.
- R&D tax credits must be utilized in the year the expenses are claimed: While it’s often the intention of a business to utilize the credit in the year they are claiming expenses, there are various reasons taxpayers are unable to claim a credit within the same filing year. Luckily, regulations allow for a one-year carry back and a 20-year carry forward provision.
As you can see, claiming the R&D tax credit can be a complex process, but the IRS definition of research and development is often far more inclusive than taxpayers may think.
