Before claiming R&D tax credits, companies should know the eligibility criteria for such credits. ~ ley Beam, Managing Attorney, Douglas R. Beam, P.A.
From eligibility criteria to knowing what qualifies, here are six answers to the question, “What are some helpful things a company should know about R&D tax credits before claiming them?”
- Be Aware of Eligibility Criteria
- Prepare Documentation to Be Audit-Ready
- Attempt to Resolve Technological Uncertainty
- Remember Non-Engineer Employees and Contractors Are Eligible
- Check Eligibility for State R&D Credits
- Know Which Activities Qualify for a Credit
Be Aware of Eligibility Criteria
Before claiming R&D tax credits, companies should know the eligibility criteria for such credits.
For example, companies must be conducting research and development activities that are considered to be “qualifying activities” under the relevant legislation. These activities include things like the development of new or improved products, processes, or services, as well as the development of new or improved software.
Companies must also ensure that their research and development costs meet certain criteria, including that they have been incurred for scientific or technological advancement, are related to a specific project, and are not already being claimed for other tax relief. Additionally, companies should ensure that they have kept appropriate records of their research and development costs.
Prepare Documentation to Be Audit-Ready
When a company claims research and development tax credits, it is crucial to have the essential documents to back up its claims. These documents should include details related to qualifying activities recognized as R&D activities and meet all criteria associated with such a claim.
More importantly, these documents must withstand scrutiny in case of an audit and provide sufficient evidence and corroborative proof in case the claim comes under the scanner. Since only some R&D ventures are eligible for these tax credits, collecting essential documents will also help shed light on this eligibility factor.
Attempt to Resolve Technological Uncertainty
One thing that a company should definitely know before claiming R&D tax credits is that they have to have actually done qualified research activities to be eligible for the credits. This means they were trying to create a new or improved product, process, or software, trying to discover technological information, or trying to improve upon something through a systematic trial and error process.
And the company has to show that they were trying to solve some kind of technological problem. It’s also really important for the company to keep excellent records of all their R&D activities and expenses because they will need to provide that documentation when they claim the credits.
Remember Non-Engineer Employees and Contractors Are Eligible
Your team can be free of engineers, scientists, and other traditional R&D roles and still be eligible for the credit. Though the program encourages research in hard sciences, any employee can perform the research activities to be eligible, including third-party contractors who help improve projects and processes.
Check Eligibility for State R&D Credits
The most important thing to know is if your company is eligible for a state R&D credit. The federal credits are obviously much larger, but neglecting to check if you are based in a state with an R&D credit could make you miss out on tens of thousands of dollars.
Currently, 38 states offer an R&D credit, and some states that do not offer one are considering it. That’s a lot of coverage across the U.S., so it is worth looking into. Checking into your state’s R&D tax credit status is an opportunity to reduce your state tax payment significantly. In almost all cases, if you are eligible to apply for a federal R&D credit, you can get the state one too.
Know Which Activities Qualify for a Credit
When I was researching R&D tax credits for my company, one of the most important things I wanted to know was what activity actually qualified for the tax credit. While this seemed relatively straightforward, I soon realized that not all the activities my company engaged in met the criteria set by the IRS.
From my experience, I suggest companies take time to read up on which activities qualify for tax credits before submitting a claim; doing so can save a lot of trouble and headache down the road.