If you own a small-to-midsize company, you probably haven’t given much thought to how the Research & Development (R&D) tax credit could help you. You might even think that the R&D credit is reserved for big businesses with tons of money to spare on technological investments. If so, then you may want to change your thought process and your business strategy.
Planning ahead is a great way to save your company’s tax dollars and there are many successful strategies from which to choose.
Click here to find out if you should be making a big purchase for your company that will help cut your tax bill.
The R&D tax credit applies to more than just businesses that have research facilities. In fact, many businesses across a range of industries may qualify for this valuable credit, but instead of asking their financial advisor for guidance, they give in to the misconception that they are not “big enough” or that they have not “big enough investments in technology.”
I recommend you avoid this mindset at all costs.
Plan For The Future
While the 2014 tax season is now over, it’s never too early to start strategizing to secure future tax savings. For example, have you thought about improving your current processes to become more efficient? Believe it or not, taking steps to make your company “lean” may be just what you need to qualify for future tax savings.
Are you familiar with Lean Six Sigma and how it can help you improve efficiency and effectiveness?
Read: Can You Explain The Concept Of Waste In Lean Six Sigma? to learn more.
According to consulting firm Smart Devine, in order to qualify for the R&D credit, your company must engage in an activity or initiative that:
- Is technological in nature – Meaning it must rely on at least one of the following: physical sciences, biological sciences, computer science and engineering.
- Is being conducted for a permitted purpose – Meaning that it must be intended to improve functionality, performance, reliability and quality.
- Involves the elimination of uncertainty – Meaning the activity must be intended to identify information required to eliminate technical uncertainty.
- Involves an experimentation process – Meaning that there must be some elements of experimentation, such as trial and error testing, prototyping, development and analysis of hypothesis.
The expenses that will be used to calculate the credit include your wages for research, supplies and contract research expenses.
Still Not Sure?
OK, so maybe you haven’t committed to an extensive lean-oriented strategy yet. That’s alright. There are many ways to qualify for this credit. Start by asking yourself the following four questions:
- Are you constantly developing new products or altering old products for new uses?
- Have you had a lean event to try and increase the productivity of a manufacturing facility, a single manufacturing line, or even a specific machine?
- Have you developed internal software because you couldn’t find one that met your needs on the market?
- Do you constantly develop prototypes to make sure your machines can produce a product that meets customer specifications?
If you answered yes to any one of these scenarios, chances are good that you will qualify for the credit.
If you do indeed qualify to receive the R&D credit, make an extra effort to maintain adequate records to substantiate the credit. This may seem daunting, but you are probably gathering the necessary information already. You probably just need to filter or tweak what you are already doing.
Email Rea & Associates to learn more about the Research & Development Credit and how to identify expenses that could qualify while promoting your company’s overall growth and sustainability. You may also be eligible to claim the R&D credit retroactively, contact us to learn more.
By Ben Froese, CPA (Wooster office)