Many business owners do not realize they can use the investment they spend on technology to generate tax benefits through R&D tax credits. But how do you know if your company is eligible for this tax credit? With the help of R&D tax credit software, you can determine which company costs qualify for the tax benefit.
It all began in 1981 when IBM released its first computer, using the software known as MS-DOS. Microsoft was only a small company back then, but Congress passed the first version of the R&D tax credit, promoting research activities.
Since then, technology has improved a lot – and it still is. However, from a tax standpoint, the advancement in the world of R&D credit means you must frequently evaluate your technology investments. It is worth reviewing your R&D tax credit software to determine if your research and development costs qualify under the tax credit regulations.
Benefits of the R&D tax credit
The R&D tax credit is among the most valuable incentives under the current tax law in the United States. Unlike the standard deduction, it is a dollar-for-dollar deduction against your tax liability. What does the tax credit comprise? That depends on different factors like your company’s research expenses. The tax credit can include outside contractor expenses, supplies, and eligible wages.
Furthermore, this tax benefit is available to more than thirty states. It is also open for all tax returns, which does not only include the current tax year but up to three prior years, too.
And in the case of insufficient tax liability, businesses can carry the deduction forward for twenty years.
About the R&D tax credit
Company expenses can be eligible for the R&D tax credit if they relate to an effort that meets the following criteria:
- Developing a new product or improving processes, which include technology platforms and software programs
- Using hard sciences, which include computer science or engineering
- Using experimentation processes, which involves testing to get rid of technological uncertainties
Many businesses do not pay attention to the eligibility for the R&D tax credit because they assume that it is only limited to developing something entirely new. But that is not the case, especially since software development efforts are equally eligible for the tax benefits. Those efforts still solve technological uncertainty somehow.
If the clients demand something, you will do whatever it takes to meet their demand. But how do you meet their needs and accomplish the task? It is an ongoing process involving researching, coding, quality assurance testing, and releasing products that meet their criteria.
Software as a service (SaaS) companies incur eligible expenses due to the real-time demand. It is also because of the interactive options they give users in accessing and managing highly sensitive information through secure connections. For example, insurance companies develop solutions specific to local and state rules. Healthcare providers create customer portals that help connect doctors and patients directly and make data-driven decisions more effectively.
Whatever industry you are in, code development, system architecture, interface design, and testing are a few of the technology investments eligible for the R&D tax credits.
R&D tax credit software: How to calculate and record the tax credit
Calculating the R&D tax credit is not simple, as you may yield inaccurate computations regarding the eligible expenses. The calculation involves comparing the current year’s expenditure and the ratio of similar expenses acquired during the three previous years. After doing the math, the resulting credit is about 5% to 8% of current year expenses.
Documenting the activities is equally important as identifying the eligible expenses to sustain the credit. If the IRS has to perform an audit, they expect simultaneous support from the team, which involves recording and keeping select information annually.
What expenses can qualify for the R&D tax credit
Correctly identifying and recording the R&D costs is the key to effectively claiming and sustaining this tax incentive. To qualify, the costs must be incurred in the U.S. While any research and development performed outside the country could be deductible business expenditures, they will not make it to the R&D tax credit calculation. Below is a list of all eligible expenses to qualify for the R&D tax credit:
- Cloud-computing expenses, which include virtual servers to host development, user acceptance testing, and quality assurance
- W-2 wages for work done in the U.S.
- Contractor costs in the U.S, staff augmentations, temporary personnel, and professional tech consultants
- Used supplies during the development stage
Ideally, your business will qualify to claim the R&D tax credit if it retains both the financial risk of loss (when the research fails) and rights to the finished product. If it involves contracts, you must carefully analyze the contract terms to identify which party is entitled to claim the R&D tax credit for the qualifying expenses.
How the R&D tax credit software can help
If the world of the R&D tax credit is still confusing to you, it may be an excellent idea to use the R&D tax credit software instead. Some businesses offer top-notch engineering analysis to work with companies like yours in maximizing the credit under the law. They have software available to help streamline the way to record the R&D credit as accurately as possible.
What does R&D software do? With more than thousands of credit studies filed, it is safe to say that you will get the assistance you need without spending a lot of your time. Such software allows you to file returns and focus on other things for your business simultaneously.
R&D tax credit software can make it easy for businesses to track R&D activities. Ultimately, the purpose of the tax credit software is to help companies receive the tax incentives they deserve.
To qualify for the R&D tax credit, you must understand that it is not limited to Microsoft and Google. If you develop new or improve processes and products, you may incur qualifying expenses. Do not miss out on the incentives you might be eligible for, and take advantage of the available R&D tax credit software.