R&D Tax Credit FAQs

You have questions and we have answers.

General FAQs

Any company that engages in U.S.-based activities that satisfy the four-part test can potentially qualify for the R&D credit.

The four tests are:

  1. New or Improved Business Component (Product, Process, Software, Invention, or Formula)
    • Functionality
    • Performance
    • Reliability, or
    • Quality
    • NOT qualified if related solely to style, taste, cosmetic, or seasonal design factor
  2. Elimination of Uncertainty
    • Related to the capability or methodology for developing or improving a product or process
  3. Process of Experimentation (to resolve uncertainty)
    • Includes Trial and Error
    • Prototyping
    • Modeling and simulation efforts
  4. Technological in Nature (based in a hard science) – process of experimentation is reliant on the principles of:
    • Physical Sciences
    • Biological Sciences
    • Engineering, or
    • Computer Science

You can schedule an introductory call with our team and we can discuss the available options for your practice. Once we have an idea of your needs, we will propose a solutions package and demo.

Absolutely!
Our internal team is equipped to service R&D claims directly, or can match you with a TaxTaker platform partner based upon your needs. Contact us and we will discuss a custom solution for your business.
Yes! We provide custom solutions for all of our partners. Whether you want full-time support running your clients through the platform or light-support and occassional guidance, we can fit your needs. We offer:
  1. Full white-label service
  2. Co-branded service
  3. Fully managed service
All tiers provide wallet-share opportunities.
We are a tech-enabled specialty tax credit software provider that allows CPA firms and financial advisors to deploy R&D studies themselves, with the confidence of our technology and team in the back-end for guidance and support.
We are comprised of specialty tax CPAs, attorneys, engineers, and business advisory personnel that have robust R&D Tax Credit knowledge and expertise.

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Not only is the technology designed specifically for accounting and finance professionals, but it allows your practice to control the way projects are organized and led. Its an extension of the services you provide your clients and depletes the risk of your clients overpaying or third-parties underdelivering on R&D projects. Additionally, the software increases:
  1. Accuracy and efficiency for clients and provider
  2. Firm Revenue
  3. New client attraction and existing client retention
  4. Competitive advantage
  5. Many more!

The R&D Tax Credit

Any company that engages in U.S.-based activities that satisfy the four-part test can potentially qualify for the R&D credit.

The four tests are:

  1. New or Improved Business Component (Product, Process, Software, Invention, or Formula)
    • Functionality
    • Performance
    • Reliability, or
    • Quality
    • NOT qualified if related solely to style, taste, cosmetic, or seasonal design factor
  2. Elimination of Uncertainty
    • Related to the capability or methodology for developing or improving a product or process
  3. Process of Experimentation (to resolve uncertainty)
    • Includes Trial and Error
    • Prototyping
    • Modeling and simulation efforts
  4. Technological in Nature (based in a hard science) – process of experimentation is reliant on the principles of:
    • Physical Sciences
    • Biological Sciences
    • Engineering, or
    • Computer Science

Qualifying expenses for the R&D credit include:

  1. Wages – Box 1 W-2 wages paid to internal employees for directly performing, supervising, or supporting qualified research.
  2. Supplies – any tangible property used or consumed in the active conduct of R&D activities.  Qualifying supplies do not include land or improvements to land, and depreciable property.
  3. Contract research – expenses paid to third parties for qualifying research.  These expenses are eligible for inclusion at a rate of 65%.
  4. Computer expenses – expenses are those directly related to software development efforts based in the United States prior to release (i.e. QA, testing, staging, development, etc.).

No, it is permanent (effective December 18, 2015).

The R&D tax credit has a history of continual renewals. Since it was created in 1981, it’s mostly been a temporary credit. The credit would expire periodically and remain expired for up to a year, then Congress would either extend the benefit retroactively and/or sometimes forward for up to a year.

The Protecting Americans from Tax Hikes Act of 2015 extended the R&D tax credit, retroactively to January 1, 2015, and the law made the credit permanent going forward. Now businesses and their CPAs can take this incentive into account in their long-range budgeting and forecasts. R&D Tax Credits are a dollar-for-dollar offset against past, present, and future tax liabilities. Plus, unused credits can be carried forward for up to 20 years.

Generally, no.  If the qualifying activities are performed outside of the U.S. (including Puerto Rico and U.S. territories), then the associated contract research payments will not qualify for the credit.  However, if the company uses foreign-based employees that travel to the U.S. and perform qualifying activities in the U.S., then the associated expense can potentially be included in the R&D credit subject to all other qualification rules.

Beginning in 2016, qualified small businesses can elect to take all or a portion of their R&D credit against their old age, survivors, and disability insurance (OASDI) liability (6.2%). This is particularly useful for start-up businesses without federal tax liability.

The payroll tax credit is limited to $250,000 annually, for up to five years.

For purposes of the payroll tax credit, a qualified small business is one with less than $5 million in gross receipts over a five-year period ending with the current tax year. The taxpayer must not have had any gross receipts outside of the five-year period ending with the current tax year.

In the case of short taxable years, gross receipts must be annualized by multiplying the gross receipts for the short period by 12 and dividing the result by the number of months in the short tax year.  Additionally, related businesses must aggregate their gross receipts.

The payroll tax credit offset can be claimed on a quarterly basis beginning with the first calendar quarter that begins after a taxpayer files their Federal tax return.

If the taxpayer can’t use the credit to offset its payroll taxes for the current quarter, it may carry the credit forward to subsequent quarters.  However, the $250,000 annual cap cannot be exceeded.

In addition to all financial documentation related to the calculation of the R&D credit, it’s important to retain documentation illustrating the nexus between qualifying activities and QRE.  There is no specific documentation requirement mentioned in the 1.41 regulations, they simply state that a taxpayer claiming research tax credits must retain records in a sufficiently usable form and detail to substantiate that the expenditures claimed are eligible for the credit.

Examples of contemporaneous documentation include:

  • Internal status reports
  • Technical emails
  • Minutes, notes, or other similar recordings from budget, board of directors, managerial or other similar meetings concerning research activities.
  • Lab notebooks
  • Patent applications
  • Product specifications
  • Test result reports
  • Project timelines
  • Diagrams & drawings
  • Engineering reports

No, a company is not required to hold patents on their technology in order to qualify for the R&D credit.  While patents are a great indicator that qualifying R&D activities were performed, it is not a requirement.