Posted by Jeffrey Feingold on 12.20.23

Tax season is just around the corner, which means business owners and CPAs across the country will be prepping their year end and filing 2023 returns. Several changes to U.S. tax laws over the past couple of years were created to benefit businesses. Your tax advisor can show you ways to maximize these benefits and minimize your tax liability for 2023.

Are You Claiming Your R&D Tax Credit?

Is your company performing any type of research and development to improve products or business processes? Federal and state tax credits are available to a host of industries for activities that are deemed pertinent to research and development (R&D). Contrary to a common misperception, R&D tax credits are not limited to scientists, medical researchers and others wearing white lab coats. The permanent extension of the R&D credit in 2015 is a great wake-up call for companies with qualified activities to take notice of their eligibility and to apply for the tax credits.

The Tax Cuts and Jobs Act that went into effect for tax year 2018, also indirectly increased the R&D tax credit’s after-tax benefit when it reduced the corporate tax rate to 21%. Additionally, the tax law’s removal of the corporate alternative minimum tax (AMT) has given more companies the opportunity to take advantage of the R&D tax credit.

R&D tax credits can immediately benefit you in several ways:

• A source of cash for reinvestment or other needs within the company
• Significant reduction to current and future tax liabilities
• Credits can carry forward up to 20 years
• Offset Payroll Liability
• Determine Which Activities that Qualify for the R&D Tax Credit

If your company has invested money, time and resources into activities that help improve a process, product, technique or formula, or contribute to the invention of a new process or product, you stand a good chance of qualifying for valuable R&D credits. Here are some common qualified research activities:

• Developing or designing new products, processes or formulas
• Developing a new manufacturing process
• Developing prototypes or models
• Environmental testing
• Certification testing
• Developing or improving software technologies
• Testing new materials or concepts
• Streamlining internal processes
• Maintaining laboratory equipment
• Developing internal software solutions 
• Documenting research activities
• Designing or evaluating product alternatives

Meeting the Four-Part Test

The 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. 

Read our FREE guide: The Business Owner's Guide to R&D Tax Credits

Collect Documentation to Support R&D Tax Credit Claims

All activities and expenses require strict documentation. A qualified tax credit professional will provide all the specific information you will need to claim any eligible credits. The R&D tax credit study will provide you with a comprehensive analysis of your company’s R&D activities, help you document your activities and defend tax credit claims in the event of an audit by federal or state taxing authorities.

Examples of documentation to compile:

• Eligible employee wages
• Time tracking data
• Payroll registers
• Job descriptions
• Meeting minutes
• Applicable project notes and lists
• Ledgers outlining general expenses

Though calculating the R&D credit is not complicated, knowing which expenses qualify and whether you have the correct documentation to back them up can be difficult for a small business or start up. 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.

To learn more about whether your industry and company activities meet the R&D four-part test, request our free assessment today.

As you plan your 2023 year-end tax strategies, remember our experts at Tax Point Advisors provide comprehensive R&D tax credit studies 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.