Due to the rapid development of technology, it is our job to stay on top of everything and always seek to learn more and create something new. It is the only thing we can do to continue upgrading the world around us. This is why there are so many companies that hire experts from different fields to research certain issues and work on solving and improving them.
This is something that governments also understand, which is why they have created the R&D Tax Credit to provide billions of dollars each year to companies for performing research and development activities. You can read a detailed FAQ about the R&D Tax Credit here.
What is Research & Development relief?
Put in layman’s terms, this type of credit is used to promote and enable companies to invest in different research projects by reducing their tax bill or allowing them to receive cashback on R&D expenses.
The US Federal government provides approximately 10% of eligible R&D expenditures as a tax credit that companies can either use to offset income taxes or to get a cash refund of up to $250,000 per year via payroll tax credits. On the other hand, the State R&D tax credit program is different for each state as some states offer it and some do not.
We will discuss the requirements to qualify for this relief in the following sections.
Who can apply for it?
When it comes to the selection of companies that can claim this relief, the line of business they are in is not of crucial importance.
The main requirement that they have to meet is to invest in developing or improving any type of project in the field of physical or biological sciences, engineering, or computer science. This can be something tangible like a new product, or on the other hand, something abstract such as new knowledge, process or technique.
Additionally, they must discover information that would eliminate uncertainty that could not be resolved with publicly available information, and the R&D must be done in a systematic process to evaluate one or more alternatives to achieve the desired result.
Even small businesses and startups can apply for it. Unfortunately, a lot of businesses do not understand that they are eligible for this incentive.
Which projects are acceptable?
We have already mentioned that the projects that are eligible for this relief must contribute to physical or biological sciences, engineering, or computer science.
For example, it can be the development of new construction techniques that will create a new type of roofing material that is of better quality and clearly, eco-friendly. While on the subject of the environment, it can also be a project related to bio-energy, i.e., engines that are fueled by biomass, or the creation of crops that are resistant to harsh weather conditions.
Furthermore, it can also be a project related to computer hardware and software development, or engineering design, that will highly improve the current technology in any way possible. It can also be something that deals with health and medicine, such as the formation of the COVID19 vaccine.
As you can see, it literally can be any type of project, from different fields, that has the potential of taking technology to the next level.
Which projects are not eligible?
Since we have already mentioned a few activities that are suitable for this relief, let us mention a few that are not. First of all, any kind of research that is conducted outside the US is not acceptable. Next, research funded by any grant, contract, or otherwise by another person or government entity needs to be excluded. As we have already explained, these activities should contribute to science and technology, meaning that those that are related to art, social science, and so on, are not eligible.
Which expenses qualify for R&D relief?
If you have just learned that you are conducting one of the activities that are acceptable for the R&D tax credit, the next is to learn what kind of costs can be covered by it. These are divided into multiple categories.
Firstly, the expenses that fall under staff costs can be covered. We are talking about taxable salaries and wages for employees who are actually working on qualified R&D projects, or any employee who directly supervises or supports these projects.
In addition, this cost also includes external employees, that is experts hired for contract research work for qualified R&D projects performed in the US, provided you retain rights to the results and are required to pay the experts whether they fail or succeed.
Supplies used during research and development can also be claimed. Naturally, these have to be closely related to the research activity and can include prototyping and testing materials. However, if you want to sell the prototype, then it is not eligible for the claim.
You can also claim off-premise lease costs of computers, that is hosting costs such as Amazon Web Services, Google Cloud, etc., if it is required for any of the qualified R&D projects.
How to apply for R&D tax credits?
Lastly, we are going to give you some basic guidelines that you should follow when claiming this relief. When it comes to the application process, you have a few options – you can either hire a tax credit expert, use an R&D Tax Credit Software like Boast.AI which also has in-house tax credit experts, or do this on your own.
Doing this on your own can be a stressful process as you first need to identify all the projects you worked on in the tax year that would qualify per the conditions above.
Next, you have to write a “Technical Narrative” of each project and identify associated expenses. Basically, this is where you will have to explain how your company’s activities meet all the essential criteria.
Then you have to calculate the associated expenses and explain how you reached the final sum. The calculations need to be entered into the R&D tax credit forms and filed with your business tax return by the deadline.
Finally, you need to make sure you have all the backup documentation and evidence to prove that you meet the qualification conditions in case the IRS decides to audit your claim.