Manufacturers and distributors have been the driving force of domestic advancement for as long as we can remember. As industries continue to grapple with the challenges presented by an ever-shrinking workforce, manufacturers and distributors continue to lead the way in discovering innovative solutions to keep their businesses ahead of the curve. In particular, developing new processes and implementing automation techniques have been vital for companies that have struggled to fill their open positions. While adding automation comes with an upfront cost, much of those costs may be eligible for an R&D tax credit. Companies have the ability to claim a federal credit that is up to 9% of their annual R&D spend as long as their costs qualify for the R&D tax credit. State R&D benefits oftentimes can push the benefit of claiming R&D even higher.
What costs qualify for the R&D tax credit?
In order for company activities to qualify for the R&D tax credit, they must meet the following four-part test:
- Permitted Purpose: Activities that are intended to develop a new or improved business component. Adding automation techniques is a perfect example of this!
- Process of Experimentation: Activities that require a process of experimentation.
- Technological in Nature: Activities that fundamentally rely on the principles of engineering, physical and biological sciences or computer science.
- Elimination of Uncertainty: Activities must eliminate technical uncertainty.
If a company activity meets the four-part test above, the following costs are eligible for the credit:
- Taxable wages for employees who perform, directly supervise, or directly support the qualified activity.
- Expenses for contractors who perform, directly supervise, or directly support the qualified activity.
- Costs of supplies used during a qualified activity.
- Rental or lease costs of computers used during a qualified activity.
Why is it important to have an R&D study?
In order to claim the R&D credit, a company must have contemporaneous documentation to support the qualifying expenses used toward the R&D credit when the taxpayer files their income tax returns. Research claims without the required documentation have the potential to be denied.
GBQ performs R&D studies that are designed to identify qualifying activities and link the relevant expenses to those activities. By engaging our team to perform an R&D study, companies will be able to utilize the information within the R&D study to satisfy the documentation requirements that are set forth by the IRS.
Whether you are a manufacturer that has been claiming the R&D credit for years or this is the first time you have considered the credit, now is the perfect time to assess whether an R&D study could make sense for your company. For more details, contact Tax Director Jeff Waldeck.
Article written by:
Jeff Waldeck, CPA
Director, Tax & Business Advisory Services