At nearly $10 billion a year, the research and development (R&D) tax credit is one of the largest incentives available. It can save service companies significant dollars — yet many don’t take advantage of it. Why, you ask?
When most people think of R&D, they think of engineers in a manufacturing facility creating prototype products or scientists in lab coats painstakingly pouring solutions into beakers. Fortunately the rules are far more liberal than that, and many industries—including many service organizations—qualify.
Take an architectural/engineering (A&E) firm, for example. From developing schematic designs and elevation drawings to designing building systems and site orientations, there are a number of eligible activities that may qualify A&E firms for R&D tax credits. And it goes far beyond just A&E firms. Technology companies, waste management firms, even retail organizations that develop proprietary software—all could be viable candidates for the R&D tax credit. Additionally, the R&D tax credit is eligible for businesses of all sizes, not just large corporations with dedicated research departments.
To qualify, a company must:
- Develop a new or an improved product or process. Remember, it doesn’t have to be new to the world—just your organization.
- Experiment with alternative designs to resolve technical uncertainty of the product or the process development.
- Use hard sciences like chemistry, engineering, or mathematics to research improvements to the product or the process.
- Conduct all activities in the United States.
- Maintain substantial rights. In addition, the research cannot be funded.
The general rule is this: if you have employees who are engineers or technical specialists working in the hard sciences, you likely qualify for the R&D tax credit.
So what’s the benefit of the R&D tax credit? You typically recoup anywhere from 4 to 7 cents for every dollar spent on R&D efforts. This can quickly add up to hundreds of thousands of dollars. In many cases your business may be eligible to file an amended return and claim the credit for previous years — meaning more money to help grow your organization.
The IRS isn’t giving away this tax credit — you need to have proper documentation to support your activities and correctly apply the law. It’s certainly a credit that’s widely recognized and used by a wide range and number of service organizations every year. Plante Moran can help determine if you qualify for the credit and assist you in developing a plan to capture the expenses related to eligible activities.
For more information, give us a call.