Kirsch Kohn & Bridge, LLP, Here Are Your Articles for Tuesday, May 01, 2018
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Is This Your Situation: Wondering if You're Eligible for R&D Credits

 

If you're a business owner who wants to eliminate the uncertainty in developing a new product or improving an existing one, you're probably engaging in research and development activities. Whether expenses qualify as R&D expenses depends on the nature of the activity to which the expenses related.

The term "product" has a wide range in this context and can include:

  • Formula
  • Invention
  • Patent
  • Pilot Model
  • Process
  • Technique
  • Similar Property

The IRS notes that "R&D expenditures generally include all expenditures incident to the development or improvement of a product." The IRS provides that the expenses related to obtaining a patent and attorney's fees that help perfect a patent application also qualify.

The following types of expenses do not qualify as R&D expenses:

  • Quality control testing.
  • Advertising or promotions.
  • Consumer surveys.
  • Efficiency surveys.
  • Management studies.
  • Research in connection with literary or historical or similar projects.
  • The acquisition of another's patent, model, production or process.

Generally, you can only make the choice to deduct R&D expenditures in the first year you incur such expenditures. R&D expenses can be deducted in one of three ways:

  • Current year deduction.
  • Amortization of deduction over a period of not less than 60 months. The amortization period begins the month you first receive an economic benefit from the research
  • If you choose to amortize, you can opt for the Optional Write-Off Method by deducting R&D expenses ratably over a 10-year period beginning with the tax year in which those expenses were incurred.

The IRS explains that you must charge to a capital account any R&D expenditures that you do not deduct currently, nor defer and amortize. You are allowed to claim the R&D credit against tax for certain qualified R&D expenditures, and combine the credit as one of the components of the general business credit. It also notes that the R&D credit is a nonrefundable tax credit.

Of course, rules are changing all the time, and there's a lot of fine print. Give us a call and we'll help you make sure you get everything coming to you, without falling afoul of IRS regulations.

 
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Kirsch Kohn & Bridge, LLP
Kirsch Kohn & Bridge, LLP
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