In the lead up to tax season, your firm’s CPA may be focused on tax planning. They may review your bookkeeping and accounting, looking for ways to minimize your tax liability. One provision that may get overlooked is R&D tax credits. Research and development tax credits may be a source of major tax savings when your firm engages in qualifying activities. To know if you qualify for this tax credit, you will first need to understand the difference between qualifying and non-qualifying research activities.
What Are Qualifying Research Activities?
Qualifying research activities may include projects that focus on creating new products, software, or process. The focus could also be on improving existing processes, software, or products. To qualify for research and development tax credits, the company engaging in the research must bear the financial responsibility or risk for the project.
The IRS has laid out a four-part test in the IRC §41(d) to differentiate between qualifying and non-qualifying research activities.
1. Business Component Test
For this test, a business component is a process, software, product, formula, technique, or invention used by the company looking for research and development tax credits. They must engage in activities connected to the reliability, performance, or quality of a new or improved function of a business component within the tax-paying company.
2. Technological Uncertainty Test
To qualify for R&D tax credits, the activity that your business is engaged in must eliminate the uncertainty. The activity would involve uncertainty if you as a taxpayer did not know one or more of the following:
· if you could achieve the desired results
· the process needed to achieve the desired results
· the appropriate design of the component your business is developing
3. Process of Experimentation Test
Generally, all of the activities your business is involved in related to getting the tax credit must involve a process of experimentation. This means using multiple approaches to achieve the result. This also means that at the outset of the research the exact method to achieve the result of the ability to achieve the result is uncertain.
4. Technological in Nature Test
All of the activities that your company does with the goal of discovering information must be technological in nature. This means that your activities must be based on accepted scientific principles, including biology, physical sciences, computer science, and engineering. Determining whether your company is engaging in activities that might qualify you for a research and development tax credit may be a detailed process. At Fusion CPA our team of experienced accountants offers to review your bookkeeping and accounting to help you determine whether you can include these tax credits in your tax planning.
What Are Non-Qualifying Activities?
While this is not an exhaustive list, accounting tasks, market and customer research, providing or receiving training, or attending industry and professional conferences usually do not qualify as activities that would meet the requirements for your firm to receive tax credits for R&D. An exception might be if your company is visiting a trade show where a prototype product is being shown with the goal of evaluating its performance as a part of the overall development process.
Benefiting from the Guidance of Tax Savvy Financial Advisers
Tax credits for R&D can substantially lower your tax liability. The IRS has strict guidelines dictating who can and who cannot qualify for these tax credits. While you do not want to use a tax credit you do not qualify for, you also do not want to allow fear of complexity to prevent you from taking advantage of a tax credit your firm deserves. Fusion CPA has a team of financial advisers who thoroughly understand tax credits for R&D. We are here to help you evaluate your research activities to determine a tax strategy that is right for you. You can learn more about our services by clicking the button below to schedule a complimentary discovery call today!
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.