How your Business Can Qualify for the Research Tax Credit

My colleague, Sean Haggard, is a CPA who specializes in the R&D tax credit and has more than 30 years of experience analyzing research and development to help companies qualify. He shared the following information about the ways that companies of all sizes can qualify for the credit:

1. What is the research credit?

The Federal Research Credit, commonly known as the R&D credit, is available to companies developing or improving products, creating software, or employing an engineer, architect, scientist or a technical services department for research and development.

First enacted by Congress in 1981, the R&D credit is often used by states to encourage employers to invest in industries directly tied to advancements in the field of science and technology. In 2012, as an additional incentive, Florida added a 10 percent state credit on top of the 20 percent federal credit available to qualifying businesses.

2. How can my small business qualify for the R&D tax credit?

A common misconception is that qualifying for the credit requires large research investments. This isn’t always the case. In order to qualify, companies need to be conducting the following:

•  Technological research — research and development in the hard sciences, such as computer science, engineering, physical or biological science
• Experimentations related to improving or developing a product’s performance, function, reliability, durability or quality

3. Which expenses qualify for the credit?

The R&D credit covers expenses directly related to the research and development that your company is conducting. Not surprisingly, the credit rewards U.S. companies for hiring people to perform R&D. Supplies that are used directly in the research process, such as raw materials, computers and software also qualify.

Additionally, 65% of the cost of outside contractors such as engineering firms and subcontractors are included for work that is performed in the U.S.

4. What is the amount of the research credit and how is it calculated?

There are two methods companies can use to calculate the R&D credit — the Regular Credit and the Alternative Simplified Credit (ASC).

The Regular Credit calculation involves calculating the base amount using a taxpayer’s gross receipts. The gross receipts hurdle acts as a threshold that a taxpayer must exceed to qualify. Anything above the base amount is eligible for a 20 percent credit.

The ASC is a simplified means of calculation and allows more companies to qualify for the credit.

With the ASC, taxpayers are allowed a 14 percent credit for the amount of qualified R&D incurred that exceeds the average qualified research expenses incurred over the last three years.

5. What is the cost of compliance?

Complying with the federal R&D credit is not as costly as it is perceived to be. In fact, it requires no more documentation than for any other tax deduction. According to Sean, enhanced documentation retention and increased time-keeping for the R&D work are minor internal costs.

6. What’s next?

If you think your business might be eligible for the Federal Research Credit, consult an accounting professional who is experienced in performing R&D credit analysis and can assist you with qualifying and capturing research credits.

Even if you can’t use the R&D credit now, you can still take advantage of it, because the credit carries over for 20 years. As an added bonus, the R&D credit is transferable. Tax credits can encourage investors and boost your company’s value if you decide to sell in the future. It’s a no-brainer.

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Lisa K. Grossman, CPA, is an associate principal at Kaufman Rossin, and a leader in the firm’s QuickBooks consulting practice. Lisa is a Certified Public Accountant in the state of Florida and a QuickBooks ProAdvisor. Kaufman Rossin is one of the top CPA firms in the country. Lisa can be reached at lgrossman@kaufmanrossin.com.