R&D Tax Credit FAQ
Who Qualifies?
A company may qualify for the R&D tax credit if they 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. Any company trying to improve what they do, be more competitive, reduce costs or increase market share will have qualifying activities. Together, we will determine the extent of the qualifying activities, the amount of the resulting tax credit, and whether the company can utilize the credits once they have been identified and documented.
Usability of the Credit
The first step is to evaluate your client’s ability to utilize the credit. The R&D tax credit can be used to reduce regular tax down to the minimum tax levels. The R&D tax credit cannot be used to offset alternative minimum tax. For individuals, use federal tax Form 6251 to determine the spread between regular and tentative minimum tax. For corporations, use federal tax Form 4626. Unused credits carry back one year and then carry forward for up to 20 years.
Once it is determined there is sufficient tax available for the client to benefit from the credit, it is time to proceed to the next step which includes determining the qualifying research expenditures and the resulting tax credit.
Estimating the R&D Tax Credit
- Partner CPA firm identifies potential candidates based on their clients’ industries and potential for qualifying activities. CPA will then ascertain whether specific clients can utilize the credit. If the answer is yes, CPA contacts SourceCorp to begin the qualification process.
- Schedule a prequalifying call with SourceCorp, a client and CPA to introduce the R&D tax credit concept and gather background information.
- CPA and SourceCorp request financial and organizational information.
- After reviewing background, financial and organizational information, SourceCorp performs a site visit at the client’s place of business or via additional conference calls to discuss employee activities, contract research and material supply expenditures and any other items necessary to compute an estimated tax credit.
- SourceCorp will compute the R&D tax credit estimate for the available years. Most clients will review the R&D tax credit for all open tax years which, in most cases, will include 2006 – 2009.
- SourceCorp will prepare a scope of work and fee proposal for discussion with CPA.
- CPA and SourceCorp will provide tax credit estimate results, scope of work and fee proposal to the client.
Has the credit been extended?
The R&D tax credit was last extended to December 31, 2009. It is common practice for Congress to retroactively extend the credit, which it has done since the credit was first approved in 1981. Currently, the Tax Extenders Act has temporarily extended the credit to December 31, 2010, while waiting for the Senate to take action. At present, the Obama Administration has proposed to make the credit permanent. In the meantime, clients can take advantage of the credit for their 2009 tax year as well as the previous tax years still open under the statute of limitations.
