Federal R&D Tax Credit Provides Substantial Cash Flow

The R&D tax credit was enacted in 1981 as an incentive for American innovation. While many companies perform work that qualifies for the credit, the most recent regulations make it easier for a wider range of companies to qualify. With the introduction of the Alternative Simplified Credit in 2007, many companies that evaluated the credit in the past and found little benefit may now be eligible for significant tax credits.

Your company may qualify for the R&D tax credit if you have invested time, money and resources toward:

• developing new products or improving existing products
• developing new materials
• building and testing prototypes and models
• developing new or improved software applications
• testing new concepts
• developing or improving manufacturing processes
• experimentation and more

The R&D tax credit reduces past, current and future years’ federal tax liabilities, creating an immediate source of cash. The credit differs from a deduction in that it is an actual dollar-for-dollar offset against taxes owed or paid. 

The credit is a source of permanent tax savings and can be claimed for all open tax years. If the credits cannot be used in a particular year, they are carried back one year and then carried forward up to 20 years. There is an exception that provides a more advantageous carryback for companies that meet the requirements under the Small Business Jobs Bill of 2010. In addition to the federal credit, many states also offer R&D tax credit incentives.

While the computation of the credit can be complex, most companies receive 4-7 percent of total qualifying expenditures. Most qualifying expenditures result from the wages paid to employees that participate in qualifying activities.  As a result, the potential for R&D tax credits can be substantial. If your company has been engaged in qualifying activities for the last several years, you may be eligible to retroactively claim R&D tax credits.

Salaries and Wages

• Typically largest component
  
• W-2 Box 1 Wages
  
• Three levels of research:
  
  • Direct Research
    
  • Direct Supervision of Research
    
  • Direct Support of Research

Supply Costs

• Consumed or destroyed during the qualifying activities
  
• Normally minimal with software development

Contractor Costs

• 65% of qualifying costs eligible