If you’re an entrepreneur, CEO, or CFO, chances are high that you’re constantly on the lookout for ways to elevate your company’s financial health. While you can achieve this in many ways, including cost-cutting and revenue growth strategies, there’s one avenue that many business operators often overlook: the Research and Development (R&D) tax credit.
What is the R&D tax credit? Simply put, the R&D tax credit is a federal tax credit that provides incentives for companies to invest in research and development. Note, that the credit only applies to these activities if they occur within the U.S. If your R&D is done outside of the country, it will not qualify. While the tax credit is not new, many operators are still unaware of its benefits, how to claim it, and the significant impact it can have on their company’s bottom line.
R&D Tax Credit Qualified Expenses
What expenses qualify for R&D tax credit? Understanding which business expenses actually qualify for the tax credit is crucial to maximizing its potential impact on your organization. The main categories of R&D tax credit qualified expenses include:
- Personnel
- Materials and/or research supplies
- Outsourced expertise (e.g., contractors)
- Hardware costs and/or specific web-based solutions
The expenses, which are officially referred to as QREs (qualified research expenses), must be directly linked to R&D. It’s essential to have clear documentation of how the expenses are connected to the company’s research activities.
Because a wide range of expenses can potentially qualify under the R&D umbrella, we recommend receiving counsel from R&D tax credit advisors, especially if your organization is heavily R&D-focused.
R&D Tax Credit Calculation
Here is a high-level overview of how the traditional calculation method works:
- Compile all qualified research expenses (QREs) incurred during the current tax year.
- Calculate the aggregate QREs incurred over a specific base period.
- Determine the fixed-base percentage by dividing the aggregate QREs by the aggregate gross receipts over that same period.
- Choose the lower value between the fixed-base percentage and 16% (fixed-base percentage cannot be more than 16%).
- Compute the base amount by multiplying the fixed-base percentage by the average annual gross receipts from the preceding four years.
- Select the greater value between the base amount calculated and 50% of the QREs incurred during the current year.
- Subtract the minimum base amount from the total QREs incurred during the current year.
- Multiply the result of the previous step by 20% to determine the R&D tax credit.
R&D Tax Credit Advisors
Calculating your organization’s R&D tax credit can be an overwhelming task, but it’s necessary to receive the highest tax credit possible. In most cases, organizations leverage R&D tax credit advisors for this task.
