Frank A. Kaczmarczyk, CPA
Among the many sweeping changes to the Internal Revenue Code as a result of the passage of the Tax Cuts and Jobs Act in late 2017 was the preservation and enhancement of the value of the Credit for Increasing Research Activities (hereafter referred to as the R & D credit).
The R & D credit was enacted in 1981 to provide incentives for taxpayers to increase investments in developing new or improved products, manufacturing processes, software, techniques, inventions, and formulae in the United States. For years it was at risk of being eliminated due to its tenuous status as a temporary credit; however in 2015 the PATH Act granted the credit permanent status as part of the Internal Revenue Code, and expanded its benefits to certain small businesses and startups.
What Qualifies As R & D
There are many activities your company may already be performing that you may consider just a normal part of doing business in your particular field. However, a multitude of activities that may seem routine can potentially enable your company to claim an R & D credit. Some of the more common activities that could give rise to the credit are:
- Developing an innovative product that is new to your market
- Engineering and designing a new product
- Conducting research aimed at discovering new knowledge
- Introducing significant modifications to the concept or design of a product
- Designing and testing prototypes
- Experimenting with new technologies
- Developing new production processes
- Research aimed at cutting a products time-to-market
- Paying outside consultants/contractors to do any of the above
These are but a sample of activities that may give rise to the R & D credit. In order to fully determine your company’s eligibility, an R & D study is the next step in the process. These studies are performed by firms that specialize in the area of R & D and devote their entire practice to the determination, calculation and administration of the R & D credit (including IRS audit support if necessary). Once the feasibility of pursuing the credit (from a cost/benefit standpoint) is determined, the process would begin, ultimately culminating with credit calculations to be utilized for the current and all prior open tax years.
Enhanced Value of R & D Tax Benefits
- Credits reduce tax dollar-for-dollar
- Due to the repeal of the corporate Alternative Minimum Tax (AMT), most taxpayers who would have been subject to AMT and therefore unable to offset their tax liability with R & D credits will now be able to do so.
- Unused credits may be carried forward 20 years
- A business may take the credit for all open years (via amended returns), plus the current year
- Shareholder/partners of pass-through entities are eligible to claim the credit on their personal income tax returns (the credit is calculated at the entity level)
Exploring the benefits of the R & D credit could result in significant tax savings to your Company or you as an individual owner of a pass-through entity. The complexity of the process requires the utilization of highly skilled professionals to guide you through the maze of rules, requirements and regulations. Contact us if you are interested in pursuing the R & D credit. We can arrange a no-obligation exploratory discussion with an R & D specialist to determine if this is the right path for your company to pursue.
If you need insight and advice on research and development credits, contact Frank Kaczmarczyk at 716-854-5034 or [email protected].