Research & Development Tax Credits
We recognize the role research and development (R&D) plays in the success of our clients’ businesses, and we strive to ensure that our clients develop and implement a strategy that enables them to receive the financial benefit they deserve along with the sustainability they need. Correctly calculating your research credits is critical because they can be used to lower your company’s effective tax rate. For companies in net loss positions, the federal R&D credit may be carried back one year and carried forward for 20 years until it can be used. Startup companies can offset up to $250,000 of payroll taxes against the R&D tax credit as long as the company has:
- Gross receipts for five years or less
- Current year gross receipts less than $5 million
The key to obtaining R&D tax credits is distinguishing between qualified and non-qualified research activities and expenses. The distinction is often subjective and may be based on how a company’s accounting and project management systems allocate activities and expenses. As a result, many allowable expenses can be overlooked by taxpayers. Our R&D team is skilled in reviewing such systems and redesigning them to better capture qualified expenses.
There are currently two available methods for calculating the federal R&D tax credit. The traditional or “regular,” method relies on a base period of expenses and gross receipts from the mid-1980s which can prove cumbersome to many companies. The more recently introduced Alternative Simplified Credit (ASC) method has become popular because it only requires examination of expenses in the credit year and for the prior three years. Qualified Research Expenses (QREs) include a percentage of employee wages, supplies used in development or testing, and a portion of product or process development consulting fees.
The regular credit is computed by measuring qualified expenses as a percentage of a business’s gross receipts and a higher percentage is applied to qualifying expenses than with the ASC method. Thus, if a business is increasing its QREs as a percentage of gross receipts measured against a historic period, it will likely be eligible for the regular credit, but the recordkeeping requirements can be onerous and may make the ASC method more attractive despite the difference in the applied percentage. The ASC is a less burdensome methodology to compute the research credit. Generally, the credit is equal to 11% of a business’ increase in QREs in the current year over 50% of average QREs in the prior three years.
Once we determine which method is most advantageous for your business, we assist in designing custom reports that identify the documentation needed to substantiate your company’s R&D claim.
Anchin’s objective for delivering substantiated studies involves exploring all potential areas of opportunity including new project design; design improvements; process or technique development or improvements; review of IT systems; design of software systems specifically designed for research; review of cross-functional process improvement; and data collection activities.
In addition to the Federal R&D tax credit, similar credits and other incentives are offered by over 30 US states to attract new jobs and industries into their region. In most cases, the rules for calculating state R&D tax credits follow the federal rules closely. Anchin’s professional R&D team can help you identify and calculate applicable state research credits. These additional state credits and incentives may lower your effective tax rate further while also providing increased cash flow.