R&D Credit for Small Business
The R&D Credit is not just for large corporations, but for all companies that design, develop or improve products, processes, techniques, formulas, inventions or software. In fact, if a company has simply invested time, money and resources toward the advancement and improvement of its products and processes, it may qualify. The R&D Tax Credit is not a deduction; it is an actual dollar-for-dollar credit against taxes owed or taxes paid. Certain companies may even elect to apply the credit to the employer portion of social security tax liabilities.
To qualify for the credit, regardless of industry, size or revenue the taxpayer must meet the following four distinct tests:
Qualified Purpose: The purpose of the activity or project must be to create new (or improve existing) functionality, performance, reliability or quality of a business component. A business component is defined as any product, process, technique, invention, formula or computer software that the taxpayer intends to hold for sale, lease, license or actual use in the taxpayer’s trade or business.
Elimination of Uncertainty – The taxpayer must intend to discover information that would eliminate uncertainty concerning the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability of development or improvement, method of development or improvement, or the appropriateness of the business component’s design.
Process of Experimentation: The taxpayer must undergo a systematic process designed to evaluate one or more alternatives to achieve a result where the capability or the method of achieving that result, or the appropriate design of that result, is uncertain as of the beginning of the taxpayer’s research activities. Treasury Regulations define this as broadly as conventional implementation of the scientific method to something as informal a systematic trial and error process.
Technological in Nature: The process of experimentation used to discover information must fundamentally rely on principles of the physical or biological sciences, engineering, or computer science. A taxpayer may employ existing technologies and may rely on existing principles of the physical or biological sciences, engineering or computer science to satisfy this requirement.
Qualifying Research and Development Expenses include salaries, supplies, contracted research services and computer leasing involved in the process described above.
The 2018 Jobs Tax Cuts and Jobs Act retained the Research and Development Credit, so this credit will be available in the future.
If you have any questions or need additional information, please contact us.
John Quigg, CPA