Posted by Jeffrey Feingold on 07.30.20

America’s economy is driven by our innovative and entrepreneurial mindset.  On July 23, U.S. Rep. Jackie Walorski (R-IN) along with cosponsor Rep. Jodey Arrington (R-TX) sponsored H.R. 7766. This legislation would double the traditional research and development tax credits, and make it easier for small businesses and start ups to access the tax credit incentive. This bill would support U.S. jobs and boost innovation across many industries, including manufacturing, medical and pharmaceuticals. 

H.R. 7766 would double the rate for each of the options businesses have to access the research and development (R&D) tax credit.

• For established companies, the existing traditional credit rate would double from 20%  to 40% of the increase in R&D spending.
• The existing Alternative Simplified Credit (ASC) rate would double from 14% to 28% percent of the increase in R&D spending.
• For companies with no history of U.S. research in the past three years, the credit would more than double from 6%to 14% of R&D spending.
• Businesses with relatively low income in the past five years can take one of the above credits as a credit against payroll taxes. The limit on the amount they may claim would double from $250,000 to $500,000.

Doubling the R&D tax credit will encourage companies, especially small businesses and startups to invest more into research and development, which will then expand the business as well as the country’s economic growth. With Congress about to expand the R&D tax credit, now is the time for business owners to take a hard look at whether they qualify for this key business stimulus.

Meeting the Four-Part Test

The R&D tax credit encourages 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 expenditures (QRE) in excess of a base amount. Expenditures that qualify are more comprehensive than you may think. QREs can include the salaries of employees and supervisors who are conducting research, supply costs and even the costs  of the research that is contracted out. 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:

1. Qualified Purpose - The purpose of the research must be to create a new or improved product, process, or formulation, resulting in increased performance, function, reliability or quality. 
2. Technological in Nature – The research must rely on principles of the hard sciences, such as engineering, physics, chemistry, biology or computer science. 
3. Elimination of Uncertainty – Activities must overcome some unknowns, such as uncertainty as to capability, optimal design, or optimal methodology. 
4. Process of Experimentation – Experimentation can be demonstrated through test batches, simulations, systematic trial and error, or other methods of evaluating alternatives to achieve a desired result. 

Find Out if Your Activities Qualify

The R&D tax credit can be a lucrative enticement for start-up businesses. To learn more about whether your industry and company activities meet the R&D four-part test, request our free assessment today. 

Though calculating the R&D credit is not complicated; knowing which expenses qualify and whether you have the correct documentation to back them up, is more difficult for many small businesses. 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.

Tax Point Advisors provides R&D tax credit study services and other specialty tax services to CPA firms and their clients throughout the U.S. To learn more about R&D tax credits from the experts at Tax Point Advisors, please call us at (800) 260-4138 or please leave us a message below.