April 30, 2018 | Posted in:

The often-overlooked R&D Tax Credit

Tax credits are one of the best tax-reduction tools for your business because they directly decrease your tax bill dollar for dollar. The business research and experimentation credit, also called the “R&D credit” could be one opportunity worth looking at this year.

“Many businesses think that claiming the R&D tax credit will automatically generate an audit. That’s just not true. However, if your business does claim this credit in a year under audit the IRS is sure to examine this area carefully.” – Ren Cicalese III, CPA, MST

The R&D credit basics

The R&D credit allows business owners to reduce their tax relative to their spending on research and development of new products. It’s often used by large businesses and corporations, but it can be used by small businesses as well.

The downside of the R&D credit is that you will need to keep careful documentation over several years. The calculation to determine business expenses that qualify for the credit can also be quite complex. That can be daunting, especially for a small business, but the benefits may still outweigh the cost and hassle.

“Only certain companies are eligible to claim the R&D credit against payroll taxes. In order to qualify, the company must have gross receipts for five years or less and less than $5 million in gross receipts for that year.” – Ren Cicalese III, CPA, MST

Is the R&D credit right for you?

Here are answers to some common questions about the R&D credit to help you determine if it’s right for your business:

  • What qualifies as R&D? This is not a comprehensive list, but if your business applies for patents, develops prototypes, develops software or builds manufacturing facilities, you may be eligible for the credit.
    “If research or development expenses are incurred for a product that fails, those expenses will still qualify for the credit. A product doesn’t have to be successful in order to qualify.”  – Ren Cicalese III, CPA, MST
  • How much could I get? There are two methodologies to calculate the credit. One is a complex formula offering up to a 20 percent credit on qualified expenses, and the second is a more simplified calculation offering a maximum 14 percent credit.
  • How are qualified research expenses determined? The IRS uses several criteria to judge whether something qualifies as a research activity, including whether it is technological in nature, is used to eliminate uncertainty, and whether it is part of the experimentation process. Once you have a research activity that qualifies, you have to link it with qualified business expenses. This could be something as simple as timesheets that show which employees worked on the research and what activities they performed.
  • What do I need? Having a disciplined system for organizing documentation over several years is essential to support your costs in the event of an IRS audit. The IRS uses information about what you’ve spent in the past on research and development. For the first year claiming a credit, the qualified research expenditures must be calculated for up to four prior years.
  • Can the credit be carried forward? Yes, if you don’t have enough income in one year to offset the credit, your company can carry forward unused credit dollars to next fiscal year, or even apply the tax credit to your employer share of Social Security payroll taxes.

How should I get started?

A consultation with an R&D credit expert can help to assess your situation and guide your efforts. It will help you understand how to document research activity, calculate costs and apply the credit to ensure you take advantage of the tax savings.


Contact Alloy Silverstein for additional tax guidance.



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