Qualifying for the Research & Development Tax Credit in the US
By Robert S. Jacobson, Kutchins, Robbins & Diamond, Ltd.
Research and Development (R&D) is often associated with sophisticated laboratory experimentation where cuttingedge technological product is created. However, the Internal Revenue Code offers a more flexible definition of research and development.
In general, R&D involves a process of experimentation to develop new or improved products or processes that are technological in nature and where an uncertainty in the outcome exists. Substantially all of the research expenses eligible for the R&D credit must contain elements of a process of experimentation relating to a new or improved function, performance, reliability, or quality of product. Many expensed activities considered routine by many companies may qualify for the credit.
The R&D process should rely on the hard sciences (physics, chemistry, biology, engineering, computer science, etc.). Activities that do not qualify for the credit include those conducted after commercial production of a product, those related to the adaptation of an existing product to satisfy a particular customer’s need, and reverse engineering.
Specific costs eligible for the R&D credit include wages paid to employees who engage in qualified research, supplies consumed during research and 65% of amounts paid to outside contractors involving R&D. The R&D credit can range from 6% to 20% of research expenses depending on the methodology used to calculate it.
Recent changes to the R&D tax credit have been beneficial for small businesses. Small companies with less than USD 50 million in gross receipts can use the tax credit against their Alternative Minimum Tax (AMT). Start-up businesses with gross receipts of less than USD 5 million now have the option to offset their payroll taxes with the credit.
Robert S. JacobsonKutchins, Robbins & Diamond, Ltd. (KRD), Chicago, IL, USA
T: +1 847 240 1040
Kutchins, Robbins & Diamond, Ltd. (KRD) is CPA firm that offers a full range of client services – accounting and software consulting, audit and assurance, tax strategy and preparation, business valuations, and financial planning advisory services. Their team of 80 members has been servicing clients in Chicago and the surrounding areas for 30 years.
Robert Jacobson, CPA, MST (Masters of Taxation), is a Director in the Tax Department at KRD. Robert has more than 20 years of public accounting experience. From tax compliance and consulting services to transaction planning and IRS resolutions, Robert counsels clients on proper tax planning, maximising their business profits and individuals gains.
Published: Winter 2017 l Photo: Gorodenkoff - Fotolia.com