An End To End R&D Tax Credit Questionnaire
From construction companies to software development organizations, many founders conduct eligible R&D activities without even knowing that they could qualify for the tax credit. Moreover, they do so without the knowledge of the credit.
The research and development credit started as a temporary government initiative to reward companies associated with innovation. However, it aided countless taxpayers in offsetting their state and federal taxes as well as increasing their annual profits in unexpected ways. This exception won the credit permanency from the PATH.
A majority of research-associated companies overpay their taxes. Resultantly, the continuous losses force organizations to shut down.
Therefore, the below post covers the 12 points of a detailed R&D tax credit questionnaire that helps resolve all uncertainties when starting.
1. Why has the R&D Tax Credit been introduced?
The R&D credit was founded in 1981 and primarily focuses on reducing the tax liabilities of the companies associated with the development and improvement of business components, processes, products, etc. Although, the credit is available at state and federal levels. But, it doesn’t work for every performed activity.
Certain types of research activities that stand fit for the credit are called Qualifying Research Activities (QRAs) and Qualified Research Expenses.
2. How Did The R&D Tax Credit Earned Its Permanency? Will It Remain So In the Future?
Although the credit started as a temporary tax returns initiative, every time, Congress renewed it for its popularity. Despite the popularity, businesses hesitated to pursue the credit due to doubtful renewal. This posed a danger to many companies evading the increasing research activities and taking on another course.
Upon observing this withdrawal, the PATH (Protecting Americans from Tax Hikes) 2015 decided to renew the credit as a permanent part of the tax code. Now, companies associated with all kinds of research avail it and will continue to do so in the future also.
3. Which Industries Qualify For The Credit?
One of the most damaging misconceptions about the R&D credit is that only technological and medical companies qualify. However, it isn’t so.
Although technological fields consume a better part of the credit, that doesn’t symbolize their sole qualification. Any company that performs an activity, which fully answers the four-part test, is capable of availing of the credit to offset its developing tax. The credit doesn’t depend upon the type or size of the industry. It depends on the activities being performed.
So, even if your company doesn’t own enormous labs or expensive equipment but plays its part in innovation, it may avail you the credit.
4. Can A Startup Company Or A Small Company Access The Credit?
A large number of startups remain devoid of credit because they don’t deem themselves worthy just because they are ‘small.’ However, the size of the organization doesn’t matter—only the activities.
According to statistical analysis, around 12,165 SME claims were made in recent tax years. Furthermore, many small organizations also made the RDEC claim.
5. Can A Company With No Income Tax Access The Credit?
Startup companies often struggle to find out if they qualify without any tax liability. Fortunately, they do. But, if the credit amount exceeds the owned amount, the company doesn’t receive the money.
In such cases, startups and SMEs use the carryforward schemes of the R&D credit to neutralize the taxes in future years.
6. Does The Credit Offer No Benefit To Companies Subjected To AMT?
Initially, the companies under the effect of AMT (Alternative Minimum Tax) could only avail of the credit for payroll taxes. However, in 2016 the authority announced that some businesses could offset their AMTs as well.
In 2017, the benefitting entities included individuals, ESBs, C corporations, and pass-through entities. But unfortunately, in 2018, the benefitting entities became limited to individuals, ESBs, and pass-through entities only.
7. What Is The Four-Part Test?
The research activity needs to satisfy the IRS eligibility criteria to qualify for the R&D credit. This is called the four-part test.
A Qualifying Purpose: Firstly, the research activity must lead to the creation of a new product or system. Or improve an existing one. Things like developing an inexpensive, lighter, or precise process or introducing a new concept stand eligible. The product of research must also have a benefitting purpose.
Technological: There are many kinds of research, but the R&D credit only favors the ones related to technological nature. It means that the activities related to hard sciences such as physics, chemistry, biology, engineering, and computer science are eligible for the credit.
Experimentation: Next, the company must conduct various experiments to ascertain that all the alternatives were tested before selecting the best one.
Removing Uncertainty: Lastly, there must be a demonstration that a certain activity aims to remove technical uncertainty and how the previous endeavors couldn’t eliminate it.
8. What Kind Of Expenses Does The Credit Refund?
Not all expenses fall in the eligible class of the R&D credit according to section 41. We have explained the eligible ones in this section of our R&D tax credit questionnaire.
Wages: Eligible wages are the wages of the employees who directly link to the research activity. It includes the technical people working hands-on on the product and the supervisors who supervise and monitor the entire process.
Contract Expenses: Contractual expenses refunding percentages differ from other refunds as the credit only pays back a limited percentage. Still, it is exponential.
The Supplies Used: The last thing that qualifies for the credit is the expenses incurred in research supplies like laboratory equipment. No general equipment qualifies for the refund.
9. What Are The Necessary Conditions Under Which A Company Qualifies For The Credit?
In this R&D tax credit questionnaire, we learned there is no specific industry sector that qualifies for the credit. However, a quick rundown will help memorize the eligibility conditions better.
- Firstly, the company must provide eligible research that satisfies the four-part test.
- Secondly, a company is only eligible if it’s on US grounds. Although, there are policies for foreign companies as well, which can be better discussed with the field professionals.
- Lastly, the documentation must include comprehensive details to avoid any inquiries.
10. What Records Are Needed For The R&D Credit?
Similar to any other tax claim, you must record all the incurred expenses. Records of expenses paid in connection to the research, a breakdown of qualifying expenses, and supporting expenses are usually demanded.
11. What Is The Purpose Of Each Section Of Form 6765?
To claim the R&D credit, all companies must fill the associated sections of the 6567 form. We will give a brief overview of each of them.
Section A: For filing a regular claim. Lines 1, 2, 3,7,8,10,11 and 17 must be filled.
Section B: Used for alternative simplified credit (One of the two types of claiming scheme)
Section C: Used to identify additional business reportings
Section D: Used by businesses subjected to AMTs applying for a refund of payroll taxes
12. What Are The Limitations Of The R&D Credit?
Although, the R&D is a credit for increasing research and offsetting taxes. There are some limitations as well.
- Firstly, the R&D credit offers a limited refund towards the AMTs affected companies.
- Moreover, no fixed refund amount is promised. Although, it is a dollar-to-dollar refund. But, the final refund amount varies with the incurred expenses.
- Lastly, the credit benefits the companies researching on US grounds only. In case a company researches in the US and manufactures overseas. It may still avail of the credit.
Lastly, it all comes to where your company is located and how it satisfies the eligibility criteria. A large number of companies unknowingly qualify for the credit. But, the lack of awareness refrains them from availing the credit. Similarly, many startups fall prey to misconceptions and don’t rise to claim a refund.
Hence, it was necessary to give a concise R&D tax credit questionnaire that covered all the points every taxpayer must know. Note that this questionnaire is only a general overview of the credit. For authentic documentation and claim, seeking professional guidance is recommended. If you think your business and its activities may be eligible then please email us at [email protected] and we will arrange your free pre-qualification health.