The Research and Development Credit is one of the most underutilized and little understood credits available in the current tax code. Hundreds of thousands of dollars in tax benefits are lost each year due to the unknowns and uncertainties surrounding it. One of the great myths about the credit is many believe it only benefits major companies whose primary business purpose is research and development. That is not the case, especially as recent legislation like the PATH Act and Tax Cuts and Jobs Act have made the credit even more accessible for small business of many types.
The R&D tax credit rewards companies for investments in developing new or improved products or processes. Projects must include the discovery of technological information that previously did not exist, technical uncertainty related to the development process, a process of experimentation, and research attributable to performance criteria.
Do You Qualify for the R&D Tax Credit?
A company’s ability to claim the R&D tax credit is based on the risk of technical failure. The R&D Credit rewards companies on their attempt at designing or manufacturing a new product, not their success.
A company must bear economic risk of their product or process development in order to claim the R&D tax credit. In other words, a company must get paid based on their success, not their attempts. In most cases, companies are paid on a fixed-price basis which signifies that they bear economic risk.
What Makes A Great R&D Opportunity?
- Do you employ degreed chemists, engineers, programmers or scientists?
- Do you develop and/or improve new products or processes?
- Do you build prototypes to test?
- Do you incur raw material costs during the product development/improvement process?
- Do you subcontract any engineering or testing functions?
- $1 for $1 reduction of tax liability
- Can carry forward credit for up to 20 years
- Ability to look back at previous years
- State credits can significantly add to the total benefit
At JHM Certified Public Accountants, we work in conjunction with outside experts in this complex arena, to evaluate a company’s specific situation to maximize credits and reduce the overall tax burden. We work to help build a credit that can withstand the highest levels of IRS or state scrutiny. Please give us a call if you’d like to discuss this or other potential tax credits further.