How to Qualify for and Claim the R&D Tax Credit
There’s a common misconception that the IRS research and development (R&D) tax credit is only available to researchers and scientists. In reality, this tax credit offers a great opportunity for small businesses to reduce their tax liability.
What is the R&D tax credit?
The research and development tax credit was originally established in 1981 to incentivize innovative R&D across the United States. The 2015 Protecting Americans from Tax Hikes (PATH) Act made the R&D tax credit permanent, modified the benefit for small businesses, and made the credit available to startups. While the phrase “research and development” might call to mind white lab coats and ground-breaking discoveries, this credit can apply to a broad range of business activities.
What activities qualify for the R&D tax credit?
There are two broad categories of activities that a business can claim towards the R&D tax credit: qualified research activities (QRAs) — sometimes called qualified research expenses (QREs) — and basic research payments (BRPs). Most small businesses can claim expenses under the QRE category.
Here are some other examples of activities that can go toward this credit:
- Developing or designing new products.
- Making enhancements to existing products or processes.
- Developing or improving upon existing prototypes and software.
Speak to a tax professional to see if any aspect of your business operations can go toward the R&D credit.
How to claim the R&D tax credit
The IRS requires documentation to be submitted to back up your R&D tax credit claim. Experts recommend that you rigorously document any activities you wish to claim toward research to establish how much was spent on qualified research activities. The burden of proof lies with the taxpayer; so, as a result, keep documents such as:
- Payroll records for employees involved in R&D.
- Expenses, receipts and accounts for supplies and equipment related to R&D.
- Contracts and invoices paid to any third-party partners involved in R&D.
- Blueprints, patents, designs, drawings and prototypes related to research.
- Project and meeting notes related to research.
This article has been republished and edited. For the full original article, click here.
Credit: US Chamber of Commerce
