July 20, 2024

Drevo Poznaniya

Make Fun of Business

The Grand Ole Opportunity for R&D Tax Credits

 

R&D Tax Credits & COVID-19 – Implications On R&D Tax Relief


We are witnessing an exponential increase in novel discoveries today. This accelerated pace of technological advancement is the result of accelerated access to information, which has generated a plethora of ideas, discoveries, and new uses for technology fueled by innovation.

Research and development tax credits (R&D) R&D grants Australia are considered one of the biggest tax opportunities available since they are low-risk, high return and largely overlooked by businesses as they utilize technology and innovation to develop new products and processes and reduce tax liabilities resulting from innovation.

A growing number of architecture, engineering, manufacturing, software and defense companies have been able to realize tax recoveries through a careful application of this tax break, thus reducing the amount of taxes they have to pay in future years.

It basically takes two steps to determine credit eligibility. Identifying potentially eligible activities is the first step. Then, if the activity meets the specified criteria, the tax credit can be calculated based on certain expenditures related to the activity.

An organization must meet all four criteria listed below to qualify as a qualifying activity:

  • Are they developing a new product or improving an existing process?
  • What is the nature of their work?
  • Has a design or development process encountered technical uncertainty?
  • Has the technical uncertainty been resolved by experimentation?

In view of this four-part test, it might appear that this credit would be more restricted to only certain types of companies. If these tests are administered correctly and effectively, however, the qualifications are quite broad. A critical factor here is whether your company’s efforts and intellectual capital have resulted in something innovative or have at least transformed something that would qualify as innovative. Alternatively, a better mousetrap would address issues related to performance, reliability, or quality when it is designed and built.

The R&D credit does not apply to certain kinds of activities. As an example, after commercial production of a product begins, research can be conducted on adaptations of existing products or processes; duplications of existing products or processes; and the cost of acquiring another’s patent. In addition, market research and testing, advertising, promotions, monitoring, and inspections can be conducted regularly.

In terms of costs, this credit includes salaries and wages for selected staff, manufacturing supplies used in R&D, and contract research (outside contractors) associated with relevant projects.

These cost drivers could account for more than half of the company’s expenses if the company is resource- or technology-intensive. The credit will not be available if the cost cannot be categorized fewer than one of these three types of expenses.

Researchers, supervisors and support personnel can use supplies such as paper, compact discs, computer equipment, laboratory supplies, shop floor supplies, as well as other incidentals as necessary. The supplies component also includes building materials used in prototypes or models, testing such models, purchasing components or sub-assemblies from third parties and incorporating them into prototypes, as well as using an extraordinary amount of electricity or another utility in the research. Depreciable property and land do not form part of supplies.

The R&D credit “R&D grants” is available to taxpayers for expenses incurred or paid on behalf of the taxpayer by anyone other than an employee.

Software development costs are considered qualified costs if they meet the test for a qualified activity and are incurred for:

  • Developed for a third party to sell or give.
  • Integrates itself into the hardware of the computer.
  • Is created for use in qualified research activities or as a component of production processes.

Software developed for internal use must also meet three additional criteria in order to qualify for the R&D credit:

  • Innovation must be evident in the software.
  • Depending on the resources allocated to the project, the software must carry significant economic risk.
  • This type of system cannot be sold, leased, licensed, or used without modification or without requiring modification.

To provide substantiation for IRS examination, documentation and supporting documentation of your claim for the R&D Tax Credit must be adequately documented. In addition to supporting documents that demonstrate experimentation, uncertainty, and a high degree of innovation or novelty, other important documents are those that demonstrate the process of experimentation and the level of innovation. Results of the experiments don’t have to be recorded in any particular manner.

For each type of experiment and the particular field of science in which it is conducted, the results should be recorded in an appropriate manner. A lab book, for instance, will sometimes be used to document results. The experiments in manufacturing are usually recorded in testing and design verification analyses, however.

In spite of the fact that this credit was enacted on a ‘temporary’ basis, it remains an attractive tax incentive for taxpayers for the designated extended period as well as for taxpayers with open tax years. This could provide substantial financial benefits to businesses that are facing federal and state income taxes. The use of the R&D credit can also provide companies with tax relief for up to three previous tax years, meaning that the recovered assets can be a great addition to the company’s bottom line.