R and D Tax Credits or Research and Experimentation Tax Credit is a general tax incentive provided to companies that spend on research and development in the United States. The R&D tax credit was proposed under the Internal Revenue Code section 41 of the Economic Recovery Tax Act of 1981.
The R and D tax credit ( www.SwansonReed.Com/R-and-D-Tax-Credits ) was meant to act like an investment stimulus that would encourage companies to invest in the United States. Most types of businesses and industries can qualify for Research and Experimentation credit provided they pass the 4-Part Test.
What Is 4-Part Test That Companies Need to Clear?
As mentioned above, the US government attempts to reduce liabilities of companies by providing tax incentives in order to part compensate the funds incurred on R&D. The credit provided is equivalent to some percentage of business’es qualified research expense. The Research and Experimentation tax credit eligibility largely depends on the research meeting the 4-Part test mentioned below.
1. Technological in Nature – the experiment/research must be based on sciences such as engineering, computer science, biology, chemistry and physics and related subjects.
2. Permitted Purpose – the objective of the research should be to create an improved or new product or improvement of the process that would result in increased quality, function, performance, or reliability.
3. Elimination of Uncertainty – the research should be focused on improvement of the process or eliminating the uncertainty about the development. In simple words, any research that is done to improve aesthetics would not qualify for the credit.
4. Process of Experimentation – you need to demonstrate through simulation, systemic trial and error, modeling, or any other method that you have assessed alternatives to achieve desired results.
Some activities that meet the 4-Part Test
· Develop new software
· Streamline the manufacturing process
· Develop/apply for new patents
· Develop models or prototypes
· Design for green initiatives
· HVAC concept and design
· Develop new, improved and reliable products
· Carry environmental testing
How R and D Tax Credits Are Calculated?
For the first three years, the company can claim 6% of the total qualified research expenses in form of R &D credits ( www.SwansonReed.Com/About-us ). From the 4th year and onwards, the base amount is calculated and the adjusted expense line is determined and the costs are multiplied 14%.
How to Know Your Eligibility for R&D Tax Credit?
The R&D tax credit considers two things- date of incorporation, initiation of research activities, and ability to provide supporting documents of research for that period of time. Based on the eligibility terms you meet, you would be eligible for one of the credits mentioned below.
· Traditional credit – for companies formed before 1st January 1984 and had more than three or more tax years with qualified research expenditures and revenue between 1st January 1984 and 1st January 1988.
· Start-Up Credit – for companies formed after 31 December 1983 and has less than three tax years with qualified research expenditures and revenue between 1st January 1984 and 1st January 1988.
· Alternative Simplified Credit – for companies that are not eligible to receive Traditional credit or Start-Up credit.
If you think your company is eligible to get R&D tax credits, you should contact R and D tax advisors and apply for the tax incentives from the US government.
Do you have any questions about R and D Tax credits? Let us know in the comments below.