The Ultimate Guidelines to Eligibility, Claim, and Preparation for the R&D Tax Credit
Often small businesses and startups end up overpaying their taxes. The reason is incomplete knowledge. Although, the Research and Development credit originally began in 1981 as a dollar-to-dollar reduction in a company’s liability. But many companies are still not benefitting from it.
Therefore, we will go into deep about how to claim research and development tax credit, so you understand every smallest detail. Before we jump into the technicalities of generating an R&D claim, it is essential to check the organization’s eligibility.
Companies That Qualify For the IRS R&D Credit
When it comes to eligibility for the R&D credit, many misconceptions arise. But since we are focusing on a complete R&D tax credit guidance, it is important to point out the facts.
- Firstly, any company that works to bring out an entirely new system or architecture qualifies.
- Secondly, even if your company strives to improve an existing product or process. It qualifies.
- Thirdly, and most importantly, for claiming the R&D tax credit, your company needs to be on US grounds.
Next comes the major sectors in which the credit is applicable. A company that fulfills those as mentioned above and the four-part test is eligible. But we are pointing out the major fields just for your convenience.
- Oil and Gas related companies
- Software developing organizations
- Retails, repairs, and wholesales
- Government and engineering companies
- IT-related and manufacturing fields
Steps To Claim the R&D Credit
Once you have determined whether your company is eligible for the R&D credit or not. Next, you need to prepare an authentic claim report.
1. Finding Which Projects Are Eligible
Firstly, you need to determine which projects your company is eligible for. Note that a project must satisfy all the conditions of the four-part test to claim credit.
2. The Appropriate Scheme
Primarily the R&D credit divides into 2 schemes. One is the SME R&D credit, and the other is RDEC. The SME is for (small and medium enterprises), and the RDEC (research and development expenditure credit) is for large organizations.
Both the schemes vary in their claim percentages. The SME scheme lets you claim back only 33% for the tax liabilities, whereas the RDEC is only a 13% claim.
Which companies qualify as SME and RDEC?
When preparing for the R&D claim, it is important to know what kind of company you are claiming the credit for.
An SME consists of less than 500 people and does not have more than 100 million in revenue. In contrast, a large organization that qualifies for the credit has over 500 working employees and makes a revenue larger than 100 dollars.
3. Coming To Finances
Once the projects and schemes are selected, the next thing is to figure out the finances. When developing the claim, you need to jot down all the applicable costs and align their research work. The cumulative documentation of the expenses is called the total qualifying expenditure.
Enhancing and to whom it is eligible?
Unfortunately, the enhancement is only available for SME schemes up to 130%. However, claiming it under the RDEC scheme is not an option.
4. The Narrative
Now comes the main part of the claim which includes all the technical details of the project. Remember you have to go in deep, highlight every person associated which each activity, and provide complete information. Leaving out information or providing vague information only results in problems. Therefore, we are listing some primary markers to help you organize a checklist to ensure that nothing gets left out.
While Writing An R&D Credit Report
For every business claim, the taxpayer must elaborate on the connection between the business component and the work done. As per IRS requirements:
- Every qualified activity that occurred
- Every individual with associated activity
- All information that a particular person or a business component discovered
5. Filling Out The CT600
CT600, although it seems like a giant insolvable puzzle. However, it’s not that hard. The form differs from an SME to an RDEC. But simply put, it is only about putting your calculations in the right places.
6. Finishing Up And Filing
Once all the above-mentioned things are completed. You need to assemble everything and file your claim to an authorized R&D office.
Which Expenses Are Eligible For The R&D Credit And Must Be Included In The Claim?
The QRE is divided into two main categories in house expenses and contract research expenditures.
According to section 41(b), the in-house expenses may be defined as the following:
- The wages are paid to the qualified employee for carrying out the qualified activities.
- The amounts consumed in carrying out the qualified activity.
- Additionally, any other expenses paid to another qualified person during the occurrence of the qualified activity are also eligible for the R&D credit.
Next comes the research expenses. When creating your R&D claim, it is important to know the eligible expenses regardless of the scheme you are claiming under. According to section 41(b)(3), the credit refunds 65% of the expenses incurred for the research process in the qualifying event.
R&D Claiming Guidance For Limited Liability Partnership
Although LLPs can also benefit from the R&D credit, unfortunately, that is not always the case. Businesses like non-public corporations and sole properties with gross receipts of under 50million dollars for three previous tax years are likely eligible for the credit.
Many eligible companies were subjected to ATMs, which the credit was unable to offset. But the companies like S corporations and pass-through entities can use the R&D credit for offsetting their ATM liabilities.
Things That Constitute To A Strong Credit Claim For SMEs
Larger organizations have other factors to go with (like the eligible costs and the research expenses), but for SMEs making a strong claim may be arduous. Therefore you can consult the below things for a strong claim.
- Explain what the project is and how it is eligible for the credit. Remember the 4 part test? Crosscheck your report provides all the details to satisfy each phase of the test.
- The next thing is to make the report readable and easy to understand. A report that is not easy to understand or has a lot of jargon; loses credit. Go with conciseness and facts rather than fancy literary talent so that your file gets reviewed easily and stacks up into the eligible pile.
R&D Tax Credit Guidelines For Loss Making Companies
Luckily the R&D credit benefits loss-making companies like it benefit the profit-making ones. For them, the R&D credit acts as an economical injection.
For instance, if a loss-making company carried out an R&D eligible task worth 100,000. It can claim the credit and get a refund of about 33,350 without paying a single dime to the Tax corporation. You can also go back to two years before and claim a refund of almost 70,000.
The credit refunding percentage for SMEs is about 14.5 to 33%, while an RDEC receives a relief of about 9.7%. Not that you receive these percentages if you surrender the current year’s losses. However, if you choose not to, then you can carry them forward or to previous years for maximum profits.
Additionally, you can include the direct labor costs in the claim report. Include the labor’s NIC, their utility and travel costs, and consumables for the refund.
The R&D credit is beneficial to companies on large and small scales. However, preparing a claim report is always deemed a problematic task. Therefore you must record the important events and their technical details timely.
If you are not sure whether your claim lands on all the rules indicated by the IRS, consider hiring a professional who knows about the recent changes in the requirements. The more concise and factual your claim is the more likely it will be accepted.