The answer to this question may surprise you.
Many companies miss this credit because they do not realize the type of costs that qualify as research and development. The credit is intended to encourage innovation. It is not just for large technological companies that develop new products.
Four factors are used to determine if a company is eligible.
- The costs must be incurred for a new or improved business component of the taxpayer. This could include a product, process, formula or software.
- The activity must be technological and rely on sciences such as engineering, computer science or biology.
- The costs are undertaken to eliminate uncertainty in the development of a product or process.
- The costs must be for the process of experimentation.
Examples of businesses that may benefit from this credit may include software development, graphic design, architectural services, food processing, manufacturing and website developers. In certain circumstances costs for internal use software will qualify for the credit.
The research credit is calculated based on the percentage of the qualified research costs for a credit up to 13.5 cents of for every dollar of qualified research costs. The credit is allowed to offset current year tax and can be carried back one year or forward for 20 years. Once important consideration is that the credit is not allowed to offset the alternative minimum tax (AMT). Therefore some taxpayers may not benefit from the credit until a year in which they are not subject to AMT. For S Corporations and Partnerships the credit is passed on the shareholders or partners.
If you have a business that you think may qualify for this credit please contact us to discuss your business activities and research costs.