Is This Your Situation: Deciding Whether Contractors Can Claim R&D Benefits
Of particular relevance to contractors is the research and development tax credit, which is a tax incentive program. Also known as the research and experimentation tax credit or the research tax credit, this provision enables companies to work at maximum efficiency. Many incorrectly think that the R&D tax credit applies only to companies that actually employ scientists. If, however, you employ a range of machinists and engineers, for example, who are developing new systems and designs, then you may be entitled to this lucrative tax break.
It can be costly to overlook this tax credit; your business may be eligible to file an amended return and claim the credit for the previous three years, which could equate to more money in your pocket to grow your business and create new jobs.
The credit has been part of the Internal Revenue Code since 1981, but the IRS requires you to properly document your activities and to correctly apply the law. Learning what can or can't receive tax credits is worth meeting with your accountant.
With your accountant, you can consider what is an applicable R&D expense. In general, wages and salaries of employees and supervisors conducting research, supplies and a portion of research contracted to outside entities are often qualified for the credit. It's not meant to cover buildings, equipment, overhead expenses or nonwage benefits for personnel.
You can apply a multipart test to establish whether particular expenses are qualified for the credit. Expenses must be incurred in the course of conducting research that:
- Roughly follows the scientific method of inquiry and evidence.
- Is technological in nature.
- Relies on principles of physical or biological sciences, engineering or computer science.
- Will be used to develop a new or improved product, process or software that will be sold, leased, licensed or used by the taxpayer.
- Seeks to improve the quality, functioning or performance of a product.
Expenses that don't qualify include:
- Research to improve style, taste, cosmetic or seasonal design factors.
- Efficiency, management or consumer surveys.
- Research in the social sciences, arts or humanities.
- Research conducted outside the United States.
- Research funded by another entity.
There is no bright-line distinction between activities that qualify and those that do not, and thus, this has been a source of friction between the IRS and taxpaying firms. There even have been court cases to better define the credit that have indeed stretched acceptable expenditures.
It is essential to ensure that you're getting the credits and deductions to which you are entitled. The laws and rules are complex, but we can help you make sure you're getting everything your company deserves.