Source: US Chamber
You may be more eligible than you think to claim expenses against the lucrative R&D tax credit.
What activities qualify for the R&D tax credit?
There are two broad categories of activities that a business can claim towards the R&D tax credit: qualified research activities (QRAs) — sometimes called qualified research expenses (QREs) — and basic research payments (BRPs). Most small businesses can claim expenses under the QRE category.
“For example, architecture firms can qualify for the credit by designing master plans or building systems, an everyday occurrence in the field,” said Tilstone. “Those in the software and tech industry can qualify by designing and implementing cloud-based IT solutions. Manufacturers can qualify for the credit when they develop second-generation products. The possibilities are endless, which makes the credit so flexible and valuable.”
Here are some other examples of activities that can go toward this credit:
- Developing or designing new products.
- Making enhancements to existing products or processes.
- Developing or improving upon existing prototypes and software.
Speak to a tax professional to see if any aspect of your business operations can go toward the R&D credit.
How to claim the R&D tax credit
The IRS requires documentation to be submitted to back up your R&D tax credit claim. Experts recommend that you rigorously document any activities you wish to claim toward research to establish how much was spent on qualified research activities. The burden of proof lies with the taxpayer; so, as a result, keep documents such as:
- Payroll records for employees involved in R&D.
- Expenses, receipts and accounts for supplies and equipment related to R&D.
- Contracts and invoices paid to any third-party partners involved in R&D.
- Blueprints, patents, designs, drawings and prototypes related to research.
- Project and meeting notes related to research.
Tilstone strongly recommends partnering with a CPA or accountant to make sure you’re eligible for this credit. “More often than not we find that new clients have been under-claiming the credit, if they have taken it at all,” he said. “We have found that during this difficult period, small and mid-sized businesses have been able to use the capital from the credit as a lifeline to keep their doors open and pay their employees. It’s likely that your peers are using it in an attempt to get through this difficult time. The capital that businesses can bring in because of the credit can go toward any growth effort: hiring new employees, investing in new infrastructure, integrating new technologies to increase competition.”