The R&D Tax Credit Rewards Innovation – Find Out If Your Business Qualifies
Designed to foster technological advancement, the federal Research and Development (R&D) Credit offers generous savings to taxpayers engaged in qualified research. Due to the complexity of its requirements, this lucrative incentive—which is now a permanent part of the tax code—is often underutilized by small and medium-sized businesses. At Capital Review Group, our team of professionals focuses on helping manufacturing, engineering, petroleum companies, energy companies, and architecture firms capture the benefits of the R&D Credit (§41).
If a business discovers that it engaged in qualified research activities during the past three years and did not claim the Research & Experimentation Tax Credit or R&D Tax Credit, the business may file an amended return to receive a tax refund. State law may provide a longer “look back period” than the three years allowed by federal law.
To be considered qualified research, the activity must satisfy each prong of a four-part test:
- Permitted Purpose: to create new or improve existing functionality of a business component
- Elimination of Uncertainty: the taxpayer must intend to discover information that would eliminate uncertainty concerning the development or improvement of the business component
- Process of Experimentation: the taxpayer must engage in some sort of systematic process, ranging from an informal trial and error process to implementation of the scientific method, designed to evaluate one or more alternatives to achieve a result where the capability or method of achieving that result is uncertain at the beginning of research activities
- Technological in Nature: the process of experimentation must fundamentally rely on principles of the physical or biological sciences, engineering, or computer science
This four-part test has grown increasingly complicated over the years with case law and Treasury Regulations designed to interpret its elements. Therefore, it is crucial that businesses seeking to reap the benefits of the Research & Experimentation Tax Credit or R&D Tax Credit, maintain meticulous documentation of their research efforts and approach the application process cautiously. Businesses are increasingly enlisting the help of niche tax professionals to assess their research activities.
Capital Review Group provides the expertise needed to navigate the complex requirements of the R&D Credit, freeing up time and capital for businesses to focus on what they do best: innovation.
When an architecture firm designed a new building for a local school that incorporated several energy efficiency measures, the firm needed to evaluate and test different materials and designs. Based on these qualifying R&D activities, the firm was able to save $188,000 in taxes through the R&D Credit. Read on…