Manufacturers have been the driving force of domestic advancement for as long as we can remember. Whether it is developing new products or manufacturing processes, or making enhancements to existing business components, manufacturers have continued to invest significant dollars into innovation. It’s no wonder that the manufacturing industry alone claimed annual R&D tax credits in excess of $7.4 billion according to the most recent statistics released from the IRS. 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:
- Activities that are intended to develop a new or improved business component.
- Activities that require a process of experimentation.
- Activities that fundamentally rely on the principles of engineering being the physical, biological or computer sciences.
- Activities that 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 at the time the taxpayer files their income tax returns. Furthermore, on October 15, 2021, the IRS announced a Chief Council Memorandum (20214101F) that will require taxpayers to submit a summary of contemporaneous documentation with their research credit refund claim beginning with tax returns filed on or after January 10th of 2022. 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 additional reporting requirements that are set to take effect in 2022.
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 Senior Manager Jeff Waldeck.
Article written by:
Jeff Waldeck, CPA
Senior Manager, Tax & Business Advisory Services