R&D TAX CREDIT AFTER TAX REFORM: CUTTING THROUGH THE CONFUSION
A few months ago, it looked like some portions of the tax reforms making their way through Congress might put the R&D Tax Credit at risk. Thanks to some last-minute lobbying by corporate interests, it survived intact. Let’s take a look at what it is and how Grobstein Teeple LLP might help your company take advantage of it, to hopefully cut through some of the confusion around the issue.
What Is the R&D Tax Credit?
The Research and Experimentation Tax Credit, more commonly referred to as the R&D Tax Credit, is an American tax break created in 1985 in an effort to reverse a decline in American research spending. Though controversial, by many economists’ estimations, it has been successful at accomplishing this feat. It has helped thousands of businesses across America fund the development of new processes, techniques, and products by claiming several billion dollars per year in tax breaks. Over the course of the last three decades, the R&D Tax Credit has had a long and complex history including having expired eight times and having been extended fifteen times, being put in peril and then rescued again and again. Most recently, it seemed in jeopardy during the final stages of negotiation of the sweeping tax reforms President Trump signed into law at the end of 2017. That peril lay in the interactions between the R&D Tax Credit and the Alternative Minimum Tax of 1982 (AMT). Rest assured, the R&D Tax Credit survived intact and fully functional.
The interactions between the R&D Tax Credit and the AMT are complex and beyond the scope of this article, but the end result of all the controversy is that what was once a niche tax credit largely unknown to the public has gotten a lot of media attention, becoming a popular buzzword. This attention has left many businesses, especially small businesses that haven’t previously retained accounting and financial professionals, confused and wondering what this tax credit is and how it might benefit them.
Who Is Eligible for the R&D Credit?
The R&D tax credit is intended to promote genuine research and development in American business. Direct expenses including contractors, researcher wages, supplies, equipment, and more may be deducted based on the eligibility of the research being claimed. That Eligibility is decided through a four-part test:
1. Permitted Purpose: The research must be devoted to creating or improving a component of the business. This component can be a product, process, technique, invention, formula, or other proprietary feature of the business that is either directly for lease or sale, or is integral to the operation of the business.
2. Elimination of Uncertainty: The focus of the research must be shown to be the discovery of information that removes or reduces uncertainty. This could be interpreted to mean that the R&D tax credit is not intended for pure scientific research or as a form of “grant” to pay an inventor to tinker around; it’s intended to help businesses make direct, predictable, and measurable improvements to their products and processes through focused research.
3. Process of Experimentation: A systematic process of research must be used. This is usually interpreted by the Treasury Department to mean that the Scientific Method must be applied in good faith.
4. Technological in Nature: Experiments must rely on fundamental principles of engineering, computer science or the physical and biological sciences.
While there are many exclusions and nuances that the government uses to parse whether a given business activity is eligible, and this article has barely scratched the surface, we hope it helped clear away some of the confusion. If you believe your company’s research and development activities meet the standards of this test, please contact our financial professionals today to see if you qualify for the R&D Tax Credit and what your next steps should be.