Each year the US government provides billions of dollars to thousands of companies for developing new or improving existing technologies, products, materials, and processes, under the US Research & Experimentation Tax Credit (R&D Tax Credit) program.
Previously, the R&D Tax Credit program would periodically expire and be renewed by Congress. Companies wishing to include this in their long-term budgeting plans couldn’t count on the credit being around for certain. In 2015, the Congress made the R&D tax credit permanent as part of the Protecting Americans from Tax Hikes (PATH) Act of 2015 and also made key changes so that more type of companies could benefit from the program.
However, we come across several companies every day who don’t think they qualify based on some misperception or the other. Here are the 10 most common R&D tax credit myths debunked:
Myth #1: R&D tax credit is a grant for R&D.
The R&D tax credit program is actually not a grant or a voucher. It is a tax credit that you must apply for when you submit your corporate or personal taxes. It is a cost recovery program. You can apply for the credit after you’ve incurred R&D expenses – US salaries, subcontractors, and materials consumed.
Myth #2: The R&D tax credit won’t help my company because my company is not profitable.
Using the federal R&D tax credit against taxes owing is just one of the ways in which companies can benefit from the program.
Startups can apply the credits towards FICA payroll tax liability of $250,000/ year if they are either pre-revenue or they had less than $5 million in gross receipts for the tax year with no gross receipts for more than 5 years from the tax year.This is an immediate impact to the bottom line. For example, if you are claiming R&D tax credits for fiscal year 2016, you should not have gross receipts before 2012 and you should not have more than $5m in gross receipts in 2016.
Companies with less than $50 million in average revenue for the 3 preceding years can use the credit to offset their Alternative Minimum Taxes (AMT).
If your company doesn’t fall into those two categories, then you can carry forward the credit to 20 years (or back one year if you had profits).
Additionally, some state R&D credit programs provide refundable credits.
Myth #3: The R&D tax credit doesn’t reduce state taxes.
Several states offer an R&D tax credit program with eligibility requirements typically following the federal eligibility requirements. While some states offer refundable credits, others offer credits that can be carried forward.
Myth #4: The R&D tax credit is only for companies working on groundbreaking innovation.
The R&D tax credit is equally available to companies developing new or improving existing products, materials, technologies or process. The development or improvement effort does not have to be groundbreaking. The regulations define research as activities constituting a systematic process intended to over overcome technological uncertainty based on information available to the company at the outset of the project.
Myth #5: The R&D tax credit is for increasing research, but our R&D spend hasn’t increased.
While the R&D credit does require an increase in research spend, the current-year spend is compared to a base, which is 50 percent of the average spend for the prior three years. Your company’s R&D spend could actually be decreasing, but your company could still be eligible for the credit.
Myth #6: R&D tax credit eligible projects must be conducted in research labs.
There is a common misperception that R&D tax credit is only applicable for those doing traditional research in a scientific lab setting. The R&D tax credit also extends to applied science, something that many companies perform on a daily basis for the purpose of creating new, or improving existing, materials, devices, products, or processes.
Myth #7: This program is only applicable for the hi-tech sector.
While very popular within the hi-tech sector, R&D tax credit is also applicable in other sectors such as manufacturing, oil and gas, agriculture, biotech and more.
Some great examples of R&D tax credit eligible projects in these industries includes:
Working to increase manufacturing speed while keeping quality consistent.
Retrofitting an existing piece of equipment to use for a different function than it was originally intended for.
Overcoming hardware limitations in order to achieve an aggressive performance target or lighter footprint.
Myth #8: Only projects with a successful outcome can be claimed.
False! The regulations specifically state that success is not required in order to be eligible.
In fact, the key to a successful R&D tax credit claim is the ability to demonstrate that there were technical challenges that needed to be overcome. Failure to succeed shows uncertainty and that there are still technical challenges that need to be overcome. As long as there is technological uncertainty and you undergo a systematic process to overcome this uncertainty, the outcome, whether it be success or failure, doesn’t matter.
Myth #9: I have to document my work with a formal time tracking system.
If you’re worried about your time tracking system, we’d like to reassure you that there are other ways to methodically estimate the time spent on an R&D project – especially if it is your first time claiming R&D tax credits.
You can still use dated journals, emails, photos of whiteboard strategy sessions, and version control to document your time and technical challenges.
Myth #10: My accountant has to prepare my R&D tax credit claim.
While your accountant needs to integrate the R&D tax credit claim schedules into your corporate tax return, they aren’t required to prepare the claim itself. You have a choice.
In our opinion, engineers are better suited to prepare R&D tax credit claims. Successful claims have an emphasis on the technological uncertainty and systematic process of experimentation undertaken. Many accounting professionals do not have as much experience and technical know-how to fully comprehend the technical work performed.
If you have any questions or want further clarification about the R&D tax credit program, don’t hesitate to contact us. We use a combination of engineers, accountants, and artificial intelligence to prepare and maximize R&D tax claims.
Meanwhile, we’ve summarized everything you need to know about the R&D tax credit program in this easy to understand infographic.