Posted by Jeffrey M. Feingold on 04.28.16
Watch this short video for an explanation of the four-part test.
The federal government implemented the Research and Experimentation tax credits in 1981 to create jobs and spur technology in the U.S. Known as R&D tax credits, the program was meant to be a temporary measure to give the economy a boost. However, the credit program was extended by Congress more than a dozen times until last December when the Protecting Americans from Tax Hikes (PATH) Act of 2015 made the R&D tax credit permanent.
The R&D tax credit originally pertained to basic research expenses, such as those occurring in a laboratory setting. Subsequent modifications simplified the credit and made it available to a wider variety of businesses.
The R&D tax credit incentivizes certain research activities by reducing a company’s liabilities for spending money on that research. The credit is equal to a certain percentage of a business’ qualified research expense (QRE) in excess of a base amount. Expenses that qualify are more comprehensive than you may think—QREs can include the salaries of employees and supervisors who are conducting research, supplies and even some of the research that is contracted out. A simple four-part test helps to determine qualified R&D activity. R&D tax credit eligibility largely depends on whether the work you are conducting meets the criteria established by the IRS in its four-part test:
Here are 10 examples of qualifying research activities:
Your accountant or qualified R&D tax credit expert can help you determine whether your business activities meet the criteria of the test by conducting a tax credit study.
The R&D tax credit can be a lucrative incentive for innovative businesses. Given the new permanent nature of the tax credit, now is the time to consider whether activities performed by your company qualify for major cash-saving tax credit opportunities. To learn more about whether your industry and company activities meet the R&D four-part test, request our free assessment today.
Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, please leave us a message below.