Research and Development Tax Credit Cheat Sheet
Research and Development (R&D) tax credits can be valuable for companies who incur R&D costs, but it’s important to know all the details. The Anders Real Estate and Construction Group put together a cheat sheet that answer questions such as what R&D credits are, what qualifies, how the credit is calculated, what to watch for, and when the credit expires. Consulting a real estate and construction professional is always advised, but the information presented below will help you get started.
What is the R&D Tax Credit?
The R&D (Experimentation) Tax Credit is a general business tax credit available to companies who incur R&D costs in the United States. The credit is generally calculated based on a percentage of qualified R&D costs incurred during the year.
There are a wide variety of companies/industries that qualify for the credit. Some examples include:
- Companies who continually manufacture/research/engineer new processes and products
- Businesses designing and developing product alternatives and more efficient designs
- Companies improving techniques, formulas, inventions, and software
- Businesses that employ engineers, scientists, software programmers, etc.
How is the credit calculated?
There are two different ways to calculate the credit, the regular method and the alternative simplified method. The regular method requires access to detailed historical records and may be required in certain circumstances. When allowed, the alternative simplified method is easier to calculate and often the preferred method.
Taxpayers are allowed to amend tax returns to utilize the R&D tax credit. As of recently both calculation methods are allowed on amended returns. Regardless of which method is used, the allowable credit should be calculated by a professional.
More taxpayers can benefit from now permanent R&D Tax Credit.
The Research & Experimentation Tax Credit (R&D) is now a permanent tax law, making it easier and more efficient for businesses to do year-end tax planning. Until the Protecting Americans from Tax Hikes (PATH) Act went into effect in December 2015, the R&D Tax Credit had always been temporary and part of the annual Tax Extenders Legislation.
Beginning in 2016, PATH provides businesses with less than $50 million in gross receipts the ability to claim the R&D Tax Credit against the alternative minimum tax (AMT). This is similar to a provision originally enacted in 2010 which benefits a significant number of closely-held businesses and their owners.
Additionally in 2016, startup companies benefit as the R&D tax credit can now be applied against an employer’s payroll tax liability. To qualify, the startup company must be within their first five years of operations and have less than $5 million of revenue. The annual cap on the amount of payroll tax liability that can be offset is $250,000.