There are a lot of things you need to do to stay ahead of the competition. One of those things is research and development.
The innovation that comes from R&D creates a better future for everyone. Better pills, Post-It Notes, cleaning products, and almost everything is the result of research and development.
R&D is also good for economic growth. That’s a big reason why there’s a major tax credit for R&D and companies that spend more than $500 billion on R&D.
Read on to learn more about the R&D tax credit and how you can use it to offset your tax bill.
What Is the R&D Tax Credit?
The R&D tax credit was created and enacted in 1981 to help companies stay competitive as the marketplace was beginning to become more globalized.
In order to stay ahead of the competition, companies had to develop better products and services while remaining profitable. They couldn’t invest millions in R&D because it would impact profits.
The solution to that was the R&D tax credit. This allows companies to take a tax credit for the investments devoted to R&D. This includes staff time, investments in materials and manufacturing, and testing procedures.
Passing the R&D Tax Test
How do you know if your claim qualifies for the R&D tax credit? There’s a four-part test that you should use to assess your eligibility to claim the tax credit. Here are the factors that are used in the claim.
Technological in Nature: It must rely on science (biological, physical, computer) or engineering.
Purpose: The end result has to improve the reliability or functionality of a new or already existing part of the business.
Uncertainty: Your R&D has to show that your intention is to eliminate uncertainty in the product’s performance.
Experimentation: You have t experiment to develop your thesis. This includes testing and trial and error.
You can use the R&D tax credit to develop proprietary software that’s used in-house. There are additional criteria that you have to meet.
For example, the software cannot be already available. It must result in cost savings or improvements in operations. The development of the software must pose a risk to your business.
One of the misconceptions about the tax credit is that it’s only for tech companies or big pharma. That’s not the case at all. Breweries and wineries can take the tax credit to improve their products, too.
Making Your Tax Claim
At the heart of your R&D claim is documentation. You just can’t tell tax authorities that you performed research and development.
You have to provide proof to back up your claims. Employee payroll records, project records, test results, and any documentation related to the research and development should be kept as part of your accounting records.
Save Money on Business Taxes
When you’re running a business, paying taxes is usually a top concern. You have a lot to deal with as it is, and it’s good to save money on taxes whenever possible.
One of the ways to save money on taxes is by utilizing the R&D tax credit. This allows you to deduct expenses for research and development. There are strict tests that you have to pass in order to claim the credit.
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