Many companies may not realize their full federal—or state—R&D tax credit eligibility due to factors such as outdated understanding of the tax law or lack of ongoing monitoring of qualifying activities throughout the tax year. With tax reform, it’s time to revisit this incentive for your company’s research and development activities.
Over the past year, the R&D service line at Anglin Reichmann Armstrong grew by an astounding 150 percent as we encountered new clients who sought more guidance on their qualifying R&D activities.
In light of the Tax Cuts and Jobs Act of 2017 and related legislation through 2018, tax credits for qualifying research and development activities offer several opportunities for companies of all sizes. For example:
- Qualifying start-up businesses can take advantage of a payroll tax offset for eligible R&D activities of up to $250,000 annually (and up to $1.25 million over a five-year period). The federal credit can be carried forward up to 20 years from the year in which the R&D tax credit was generated but not claimed. This is a huge opportunity for companies to offset FICA payroll tax on their quarterly Form 941 filings.
- Beginning in the 2016 tax year, eligible small businesses can now claim the R&D tax credit against alternative minimum tax (AMT), which was a significant restriction for many taxpayers in previous years. Even with changes in corporate tax rates or AMT, this is still a big opportunity for many clients.
- Large companies with significant R&D investments but zero gross receipts, such as life science companies developing medical devices or pharmaceuticals awaiting approvals, may also qualify for the payroll tax offset.
- In addition to the federal R&D tax credit, more states are extending their own R&D tax credit provisions to entice businesses to locate or relocate. For example, Florida offers an R&D tax credit.
- Taxpayers that engage in software development (e.g. customer facing applications, mobile apps) may have greater opportunities to claim R&D credits this year and going forward due to expanded IRS provisions.
We are seeing more guidance issued by the IRS to implement new provisions or clarify technical requirements, which will allow more proactive analysis and client support by Anglin’s R&D team. This guidance is designed to improve compliance and manage the frequency and scope of IRS auditing.
In our R&D assessments and studies, we help our clients understand the qualifying criteria of the credit; commonly referred to as “The Four-Part Test”. Upon meeting the four-part test, a company’s qualifying expenses could include:
- Taxable wages for employees who perform or directly supervise or support qualified activities.
- Cost of supplies used in qualified activities, including extraordinary utilities, excluding capital items or general administrative supplies.
- 65% of contract research expenses for qualified activities provided the taxpayer retains substantial rights to the activity’s results and must pay the contractor whether it succeeds or fails.
- Rental or lease costs of computers used in qualified activities such as rental of server space in relation to developing or improving a component (e.g. product, process, software, technique, invention or formula).
The R&D tax credit is intended to increase new research and development in the United States. Activities typically excluded include those performed outside the U.S. as well as routine testing, funding by an unrelated third party or activities performed for the sole benefit of the taxpayer. There are other exclusions, but those can be explored during a quick assessment of the company’s research and development activities.
If you are looking for more opportunities and guidance to support expenses related to research and development at your company — or to amend a past return — contact the R&D team at Anglin about our services.