Changes to how the R&D tax credit is applied could have beneficial implications for companies of all sizes – provided they keep their documentation in order.

The Protecting Americans from Tax Hikes Act changed the way the R&D tax credit is applied. Effective for 2016 tax returns, companies that invest in research and development can factor a federal income tax reduction into their financial planning – rather than having to apply for it retrospectively – as the R&D tax credit is now a permanent fixture.

The changes to how the R&D tax credit is applied will save hundreds of thousands – or even millions of dollars – for companies of all sizes, and it is important to note that the credit is not limited to companies with recognized R&D departments. Any company that develops or improves products, software or processes could qualify subject to meeting the qualifying criteria.

Does Your Company Qualify for an R&D Tax Credit?

The qualifying criteria is vague and open to interpretation. It is suggested that any company that develops or improves products, software or processes seeks professional tax advice to ensure they qualify for the R&D tax credit, as this is one of the areas that comes under scrutiny during IRS audits. However, to be in the right area for a tax credit, a company has to invest in one of the following activities:

  • Technological experimentation in the fields of engineering, physics, chemistry, biology, or computer science.
  • The creation of a new or improved product or process that results in increased performance, function, reliability, or quality.
  • The elimination of a technical uncertainty about the development or improvement of a product or process.
  • Activities undertaken to eliminate or resolve a technical uncertainty that involve an evaluation of alternative solutions.

Costs that can be included in a tax return include salaries to employees involved in research and development, their managers and support staff. Related procurement, legal and computer leasing costs – including cloud computing services – can be included, as can a portion of payments made to U.S.-based contractors. Again, seek professional tax advice that relates to your specific circumstances.

If eligible, companies can claim the R&D tax credit retrospectively for the past three years (longer in some states with an extended tax statute) and carry forward credits if they have a zero tax liability or have previous made a loss. However, immutable documentation must be used to support the credit is essential, and it may save future headaches if you seek advice about what documentation is acceptable to support your claim.