There is much ado with tax credits nowadays, considering that most businesses have suffered so much in the past year due to the lockdowns and quarantines. Earning tax credits can go a long way to help your business minimize tax liabilities and even have extra cash to invest back in the company.
Tax credits allow businesses to earn back money from their tax liabilities, thus if your annual tax due is $1000, and your tax credit amounts to $300, then that means you only need to pay $700, you get to save the amount of tax credit that is awarded to you. There are several tax credits that businesses can take advantage of, but one that yields a higher value of tax credit and but is not used as much by business taxpayers is called the RD tax credits. R&D tax credits are business tax credits that businesses can apply for as long as they have research and development activities and expenses.
To encourage businesses to engage in research and development activities and innovate products, services, and processes, the federal government has provided for the R&D tax credits as an incentive to said businesses. Research and development are key drivers of growth and success in the market, and successful businesses also drive the nation’s economic growth, so this is a win-win situation for the government.
However, of all the tax credits available to business taxpayers, the R&D tax credit appears to be the least applied for. This is because businesses often believe that they do not qualify for this particular tax credit as they do not have research and development activities and expenses. This is however far from the truth as the definition used by the provision for R&D tax credits is very broad and some operational activities can be considered research and development.
How To Qualify for RD Tax Credits?
To apply for or file a claim for RD tax credits, one has to establish that the business does have research and development activities and has spent for these activities as part of business operations.
Based on the policy guidelines on what constitutes research and development activities that will qualify for the R&D tax credits include but are not limited to the following: planning and implementing improved processes, systems, and sourcing materials, use of new software in automating production, operation, purchasing and sales, making use of data for decision-making, developing financial models, designing tools, molds and other materials as well as hiring consultants for R&D projects, developing prototypes, new models, innovating new products, using alternative materials and improving efficiency using software and hardware tools.
With the said definition, it is obvious that almost all types of businesses can have valid and qualified research and development activities. Most people believed that R&D only involved projects that were done by scientists and in laboratories. The second factor that is crucial to the qualification process is that the business taxpayer must be able to demonstrate that the R&D activities have been paid for by the company and forms part of the operational expenses.
In this aspect, the company must be able to provide documentation of the financial costs of the said activities and projects. This can easily be had through the financial records of the company like payrolls, invoices, vouchers, and receipts from suppliers and consultants.
The amount of tax credit awarded to the business taxpayer will depend heavily on the qualified research and development activities and expenses, thus to maximize the claims made by the company, all the needed documentation should be gathered and presented to the IRS for auditing. The only way to ensure that this becomes a reality is to make sure that all research and development activities and expenses are properly identified, categorized, reported, and documented.
How To File Claims for R&D Tax Credits?
Filing a claim for R&D tax credits is a straightforward matter, however, it does entail a lot of work and time that would simply not be possible if the business owner does it alone or even with the help of a team.
Making sure that the business continues to operate daily and working on the needed requirements for the filing of R&D tax credit claims is too much to handle even for those with the best intentions. A better option in this matter would be to seek the assistance of experts who specialized in the processing of R&D tax credits claims.
The team of experts will prepare a feasibility analysis of your research and development activities and expenses. The feasibility analysis will provide the company with qualified research and development activities and expenses, and this will be verified through the teams’ audits, evaluation, and interviews. After which, the firm will present the results of the feasibility report and the estimate of the tax credit that you might claim with it.
This is also when the firm will present to you their financial costs and if you agree to it, a contract will be made and the firm will proceed to work with your company and gather the necessary documents, file the claims and be there to help you when the IRS comes for an actual audit. After filing the claims application, the IRS will send a team to verify your claims and inspect your processes and records, the firm will be present during this audit to help you every step of the way so you will surely get the tax credit that you deserve.
Whether your claims will yield the estimated value of tax credits or not, it is still dollar value that can help your business in any way as we all know that this year is about surviving and not about making a profit.
It is important though to note that hiring a firm may entail additional expenses but it is a necessary expense as it will also result in a possibly substantial amount of savings as the R&D tax credits can be applied three years back from the filing for the first claim, and if that tax credit is unused, it can be carried over the next year.