Organizations that seek to develop new or improve products and processes can benefit from the R&D tax credit.
However, many businesses are unaware that they could qualify for a dollar-for-dollar tax credit through their daily operations, irrespective of industry or size.
The method to calculate R&D tax credit amounts is not always immediately apparent. If you’re confused about how to calculate R&D credit, Eide Bailly has prepared an R&D tax credit calculator to give you an idea of how much you could be eligible for when filing your taxes.
What is the R&D Tax Credit?
Many businesses eligible to claim this tax credit don’t even know it exists. So, what are R&D tax credits?
The Research and Development tax credit is an initiative launched by the Federal government in 1981 to incentivize American businesses that innovate. It’s designed for research and development, helping companies that design, develop, and improve business components. This can include products, processes, techniques, software, and inventions that result in new or improved reliability, functionality, quality, or performance.
The R&D tax credit is available on the federal level and many states also have a credit. The credit became a permanent part of the tax code in 2015, with the passing of the PATH Act. The PATH Act also revised the qualification requirements, enabling more businesses than ever before to qualify for the credit. It also allowed small businesses to claim the Payroll Tax Credit to lower their payroll taxes.
If you’re unfamiliar with the credit, it probably sounds like you need to be a large national or multinational corporation to qualify, but this isn’t the case. Even smaller businesses can be eligible for substantial amounts in tax relief. So how do you know whether you’re eligible?
What Activities Make You Eligible for the R&D Tax Credit?
Many activities qualify for the R&D tax credit and the Eide Bailly R&D tax credit calculator can provide you with a high-level estimate of your potential credit. Checking your eligibility is simple enough — if you fall under any of the following four categories, you may be able to claim this tax credit:
- Your R&D activity is conducted on U.S. soil.
- You’re developing or designing innovative products or processes.
- You’re investing in improving products and processes.
- You’re assessing or implementing new alternatives or developments within the design and development process.
R&D tax credit examples include:
- You identify improvements to current products to add new functionality or improve reliability in the field.
- You deploy new technology or make changes to your production processes to boost productivity and speed.
- You develop new software or improve performance of client-facing technology.
You can claim staff salaries, raw materials, third-party contractors, and computing costs in the R&D tax credit. However, it’s always wise to consult an accountant to ensure that an activity or expense falls under the definition of research and development.
How to Calculate the R&D Tax Credit
You may be wondering whether you should calculate R&D tax credits in-house or if it’s best to hire a professional to assist you with the credit. Before doing either, you could try an online R&D tax credit calculator to learn more about your potential benefit. Performing an R&D credit calculation is complicated, and mistakes could lead to problems with the IRS down the line. So, while an in-house resource or online R&D tax credit calculator may be a good starting point, we always recommend you work with a reputable R&D tax credit service provider. An R&D service provider will assist in determining qualified activities, the associated costs, as well as maximizing the benefit to the business as there are two methods of calculating the credit in addition to navigating the complex rules around the calculations.
R&D Tax Credit Calculator
Easily predict how much you could be eligible for with our R&D tax credit calculator. Our tax credit calculator requires just a few critical pieces of information, and you’ll get an idea of what you could get back when filing your taxes.
All you need to do is enter the number of salaried employees in your research and development department. Enter how much you spent on R&D in the past year, and our calculator will provide you with an estimated tax benefit.
How Much Will the R&D Tax Credit Benefit You?
R&D TAX CALCULATOR
Additional state credits may apply
No state credit available
Supplies include any tangible property used in R&D, i.e. prototype units (even if eventually sold), experimental fixtures and tooling, and samples used for field testing. Exclude equipment being depreciated.
Contractors must be performing research (i.e. design, prototyping, testing, etc.) on behalf of the taxpayer, and must be paid even if the research is unsuccessful to qualify.
Federal credits may be available up to:
This tool is for general information purposes and does not take in to account the complexities of law and factual circumstances that could affect qualification for the credit. Claiming the credit requires a thorough, in-depth analysis of specific issues.
Note that this is only a ballpark figure as the rules are complex and each business has a unique fact pattern which is factored into the credit calculation.. Always hire a professional accountant to help you compute, document, and complete all the forms necessary to claim the R&D tax credit.
The R&D tax credit isn’t the most straightforward tax credit available to American businesses. Here are answers to some of the most common questions business owners have.
Who is Eligible for the R&D Tax Credit?
You must be seeking to advance products or processes within your industry. There are no limits on how large or small a company you need to be to claim the tax credit. However, you do need to justify your qualified research expenses and carefully document the expenses and activities. Eligibility is complex, so make sure you hire a professional.
What are the Benefits of the R&D Tax Credit?
The obvious advantage of the R&D tax credit is that this is a dollar-for-dollar reduction on taxes, meaning you can reduce your tax liability and your effective tax rates. Remember, there are Federal and state R&D tax credits available. Mitigating how much you pay in taxes can increase your ROI, improve cash flow, and increase your earnings per share.
Which Activities Don’t Qualify for the R&D Tax Credit?
The IRS provides guidance on which activities will not qualify you for the credit. First, any R&D conducted outside of the U.S. is expressly excluded. You also need to be aware that activities like market research, management, and preference testing aren’t considered qualifying expenses for this tax credit.
Will Claiming the R&D Tax Credit Increase My Risk of Getting Audited?
There’s a popular myth that claiming the R&D tax credit or any business tax credit will enhance your risk of getting audited. There’s no evidence that the IRS is more likely to audit a business that claims this tax credit on its returns based on publicly available information. However, the risk is always there. It’s always best practice to hire a professional who can ensure that your records are in order and the documentation requirements for claiming the credit are met.
Can I Claim the R&D Tax Credit for a Previous Year?
The R&D tax credit is subject to limitations on amending a previous year’s tax returns and is often limited to three years.
Partner with Eide Bailly
The R&D tax credit is one of the most confusing tax credits, thanks to the criteria and expansive case law regarding qualified research expenses. Factoring in carryforward and carryback periods as part of intelligent tax planning makes the process even trickier to negotiate.
Use our calculator to give yourself a ballpark figure and hire an Eide Bailly accountant to protect your business from risk.
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