R&D Tax Credit Software:An Introduction to R&D Tax Credit

Since its introduction in 1981, the Research and Development Tax Credit (formerly known as the Research and Experimentation Tax Credit) has been one of the most important resources used by businesses , in different sectors, to improve their results. This tax incentive was initially designed to encourage domestic innovation and R&D investment, but it has constantly evolved over its existence. According to the research, approximately 17,700 public and private companies claimed this tax incentive totaling $6.6 billion. Most of the eligible companies (more than 65%) ignored or failed to take advantage of this great opportunity. If you are considering claiming an R&D tax credit, you may want to consider hiring the services of an R&D Tax Credit Software provider.

What is the R&D tax credit?

The R&D tax credit was designed to provide US companies with a tax incentive to increase their spending on research and development in the United States. If a company's activities meet the requirements for the R&D tax credit, there are two ways to calculate it:

• Traditional method – under this method, the credit corresponds to 20% of the company's eligible research expenses for the current year, in addition to a base amount.

Calculating the base amount can be quite complicated. It is the result of a fixed base percentage and the average annual gross receipts of the business for the previous four tax years.

Companies that were unable to claim the R&D credit in the past or those that did not have the necessary data to determine their historical eligible research expenditures are more likely to find it easier to calculate their credit using the second method. /P>

• Alternative Simplified Credit Method –there is a four step process involved in this method and they are:

1. Determine the company's average qualified research expenditure (QRE) over the last three years.
2. Multiply this average by 50%
3. To subtract the Stage 2 result from the company's current year ERQs and
4. Multiply the result of step 3 by 14% to calculate the credit

If the company has had no research expenses in the last three years, the tax saving is 6% of the eligible research expenses for the current year.

Many states also have their own R&D tax credit programs. These come with their own rules and limits, so it would be wise to consult a professional in your state to determine if you qualify for both federal and state credit.

Advantages of the R&D tax credit

The R&D tax credit is one of the most cost-effective incentives under current US tax law. In effect, compared to the standard deduction, it is a dollar-for-dollar credit on your tax liability. Depending on factors such as your business's qualified research expenses, the credit may include qualifying salaries, supplies, and expenses of outside contractors. Additionally, this tax incentive is available in over 30 states. Finally, the R&D tax incentive is available for all open tax returns, including up to three prior years and the current tax year. In case of insufficient tax liability, companies can defer the credit for 20 years.

How do you qualify?

A common misunderstanding about the research and development (R&D) tax credit is that it relates exclusively to lab coat businesses and manufacturers. However, new laws have expanded the industries and businesses eligible for credit. Here are some of the most common qualifying R&D activities:

• Prototyping and patent applications
• Design and pre-production engineering of a new product or improvement of an existing product
• New process or production improvement
• Software development for sale or internal use
• General trial and error experimentation
• Experiment or try new concepts, materials, tools, formulations and processes

Here is a summary of the four-part test criteria for qualifying research expenses:

1. Removing uncertainty – the activity must be performed to eliminate uncertainty about the capability or method of developing or improving a product or process. It may also involve determining the suitability of the product design.
2. Experimentation process –this process is designed to evaluate one or more options to achieve an outcome when the ability or method used to achieve the outcome, or the relevant design of that outcome, is uncertain at the outset of taxpayer research activities.
3. Authorized objective –activity must be related to the performance, quality, function, composition and reliability of a new or improved commercial component. It is not necessary to discover anything new in your industry, only what is innovative or new to your company's products or processes.
4. Technological in nature – the activity carried out must be based on the basic principles of the physical sciences, computer science, engineering or biological sciences. For example, if your business involves food production, simply adding more salt to your product does not necessarily qualify you for the credit. However, a method using hard science to improve the flavor of your product would.

R&D Tax Credit Software

If you need help filing an R&D tax credit claim, you can get professional help, or you can use R&D tax credit software. Some companies provide top-notch technical analysis to help business owners maximize statutory credit. They have software that helps streamline how to capture R&D credit as accurately and in the most IRS defensible way possible. Discover the GOAT.tax software platform.

The GOAT.tax software platform is well established when it comes to R&D tax credits. With over 9,800 tax credit studies filed, it's safe to say that they know all about it. They will provide you with all the assistance you need so that you spend less time filing returns and focus more on the things that matter to your business.

GOAT.Tax's R&D tax credit software makes it easy for business owners and key innovators to track their R&D activities as they happen. This software was developed to help businesses get the tax credit they deserve. With their years of experience on their national team of over 50 R&D tax professionals, you can be sure they can take all the guesswork out of this complicated tax incentive. In short, they take care of you!