The Research and Development (R&D) tax credit (26 U.S.C. § 41), first established in 1981, is an outstanding opportunity that qualified U.S. businesses of all types can take advantage of to substantially mitigate their tax liabilities. This government-sponsored tax credit is available at the federal and state level (in some states). The R&D Tax Credit is intended to incentivize businesses including wine and construction to invest in innovation and participate in research and development.
Your company need not be a major corporation to be eligible for the Research & Development tax credit, this benefit is available to qualified businesses of all sizes. Moreover, the list of practices that constitute research and development in the eyes of this statute is much more extensive than business owners may realize. There is a significant list of activities that qualify companies to apply for the credit. Read on to understand more about the Research & Development tax credit and how your operation can benefit from it.
Since the introduction of the R&D tax credit in 1981, there have been various changes to the law that have been brought about by new legislation, changing regulatory practices, and the expansion of provisions that allow more businesses to benefit from the research and development incentives.
Perhaps the most significant change to the R&D tax credit came in 2003 when the so-called Discovery Rule was eliminated from the guidelines. This rule, which included language that stated research activities had to be “new to the world,” was modified to say that research had to be “new to the taxpayer.” This seemingly simple change to the legislation allowed for a significantly larger number of businesses that were now eligible for the R&D tax credit.
In 2015, another new piece of legislation, the Protecting Americans from Tax Hikes (PATH) Act, made the R&D tax credit program permanent. This change not only made the R&D tax credit available to eligible startup companies, but the PATH Act of 2015 also leveled the playing field by helping small and mid-sized companies access the same benefits as their much larger counterparts, by allowing them to eliminate alternative minimum tax (AMT) limitations against the R&D tax credit.
You may be pleasantly surprised to learn that your business is likely eligible for the R&D tax credit. A company’s eligibility to qualify for the R&D tax credit is covered under a broad net that includes more activities and operations than business owners often realize. Companies who participate in activities to develop new products or improve upon their current products, work toward developing new technologies, create new production processes or improve upon their current means of production are eligible to claim this credit.
Companies may also take advantage of up to $1.25 million (or $250,000 each year for up to five years) of the R&D tax credit if they meet the qualifications of the startup provision. In order for a startup to be considered eligible, it must have less than $5 million in gross receipts for the credit year, and additionally, it must have no more than five years of gross receipts.
Eligible items include wages paid, related computer expenses, the use of sub-contractors, and raw materials and supplies. Companies that are eligible to claim the R&D tax credit for the current and previous tax years, making it even more prudent to keep documentation for any qualifying activities and payments in case they are needed to support a business’ claim. These may include payroll records, a ledger of related expenses, project lists, notes, and any other documents that may be pertinent.
There are two methods for calculating a R&D tax credit.
The first is called the Regular Research Credit (RRC) method for calculating the credit and is equal to 20% of the company’s current year qualified research expenses over a base amount. The second is the Alternative Simplified Credit (ASC) method which is a multi-step process that involves calculating the company’s average qualified research expenses (QREs) for the past three years and performing various calculations based on that figure.
Navigating the R&D tax credit process involves complex and multi-step calculations and requires a solid understanding of tax laws and evolving requirements.
For the IRS to validate a business’ claim to the credit, it must provide some key information to demonstrate eligibility. These include documentation of the business activities for which the R&D tax credit can be applied to for the years applied, an analysis of the research activities that have been conducted, the goal of said research, and the names of the individuals who conducted the research. Further, the business must itemize which supplies, salaries, and other qualifying research apply toward the credit eligibility.
Recognizing your company’s eligibility is the first step towards securing the funds that will help you to further research, develop, and refine your products. When you’re ready to start the process of securing the R&D tax credit for your wine or construction business, the tax and accounting professionals at the Allen Wine Group is ready to help. Contact us today to get started.