Strategy

Fact or Fiction: The Truth About Research & Development Tax Credits

Many companies don't know how broadly Research and Development (R&D) Tax Credits are defined or that recent changes extend R&D opportunities. Because of this, many may be missing out on ROI.

Thanks, in part, to changing markets, an increase in workload and simply being busier than ever, finance executives are increasingly being asked to do more with less. That’s why finding alternative or not-top of-mind solutions to accomplish finance goals is also more important than ever. And the federal government can be a big help with a recent extension of the Research and Development (R&D) tax credit.

The R&D Tax Credit was originally passed in 1985 to combat a decline in U.S. economic performance. Since then it expired eight times and was extended 15 times. On December 18, 2015, the Protecting Americans from Tax Hikes (PATH) Act of 2015 was signed into law. The PATH Act permanently extended the R&D tax credit and effective as of January 1, 2016, it also broadened the ability of many businesses, especially Small-to-Midsize Businesses (SMB), to take advantage of the R&D Credit.

Recognizing that thousands of our clients may not know that they are missing out on big R&D credits, ADP has formed an alliance with KPMG LLP (“KPMG”), the US audit, tax and advisory firm, to help eligible companies reap the benefits of the R&D Credit in an efficient and cost effective manner.

R&D basics: Knowledge = increased ROI

The R&D Credit is a tax incentive to encourage investment in product or process improvements in the United States. The federal incentive allows eligible companies to receive a tax benefit and a dollar-for-dollar tax savings up to 20% of their qualified R&D spending above a base amount calculated from prior years.¹ In addition, many states also offer R&D credits for qualifying research activities performed within their borders.

The definition of R&D tax credit laws is more broad than many finance executives may think. In fact, basic improvement and development in many areas of your company may qualify such as updating software, manufacturing processes, products, formulas, quality assurance, wages paid to line employees conducting research and more. And that could add up to thousands of dollars of return on investment regardless of your revenue or income tax status.

While the federal benefit typically ranges in single digits percentage-wise (a percentage of qualified spend – e.g., 6% of qualified spend), companies also may be eligible to claim tax credits in the double digits for their qualified research spending. Keep in mind this tax benefit may be a permanent one with dollar-for-dollar tax savings.

Big or small, the benefits of R&D are made for all

Every year more than 100,000 tax payers in the United States claim over 12 billion dollars in federal R&D tax credits.2 And while many of them include large companies, the federal government has been working for years to expand the amount of credits that are available to small and medium-sized businesses. In addition, PATH also greatly enhanced the R&D tax credit benefits for small businesses including:

  • “Eligible small businesses,” generally defined as those businesses having less than $50M in average gross receipts over the past 3 taxable years, may now be eligible to use the R&D Credit to help offset their AMT liability
  • “Qualified small businesses,” generally defined as those businesses having less than $5M in gross receipts for the taxable year and having gross receipts for no more than 5 taxable years, may now be eligible to use the R&D Credit to help offset their payroll taxes (FICA), up to a maximum of $250,000 per taxable year.

Don’t let “claiming” complexity stop you

While PATH is great news for finance executives looking to improve on their ROI, the eligibility and documentation requirements are stringent and intricate. Companies seeking to claim the R&D Credit must be prepared to perform an R&D study, which involves identifying, documenting, and supporting the associated costs of their qualifying R&D activities and expenses. And the IRS does check to make sure that organizations taking R&D credits qualify for them.

Get the facts

To view ADP’s September 28, 2017 webinar,  “Fact or Fiction: The Truth About Research & Development Tax Credits” on-demand, click here.

Here’s what you’ll learn:

  • Who benefits from R&D tax credits (which type of industry/organization size)
  • What qualifies for R&D tax credits (what is qualified research/where is it performed/examples
  • Why now is the best time to evaluate your eligibility to claim R&D tax credits
  • Best practices for using R&D tax credits to offset your research and development investments.

1 See IRC section 41 (2016); Protecting Americans from Tax Hikes Act of 2015, Consolidated Appropriations Act 2016, Division Q, H.R. 2029, 114th Congress (2015-2016).