You could be leaving big money on the table by not thoroughly exploring your eligibility for the R&D Tax Credit. “Most companies believe they have to have people in lab coats looking through microscopes to take advantage of the tax credit,” says Brandon Edwards, CEO of Tax Credit Co. in North Hollywood, CA. “They say ‘we don’t do any research.’ But under the code, the credit is available to anyone taking economic risk to create new and improved products, process, or software, which is most companies.”
According to Edwards, the IRS estimates that less than 30,000 companies take advantage of the tax credit annually. He believes, however, that hundreds of thousands of companies qualify for the credit. Are you one of them? Check out these seven misconceptions about the R&D Tax Credit, provided to BNET by Edwards.
1. Only companies that develop industry-leading products and technology qualify. “Due to regulation changes over the past seven years, companies no longer need to lead the way in order to qualify,” says Edwards. Companies must meet four requirements, he says. “Simply making improvements over the company’s existing products, processes and software qualifies for the credit. It can be as simple as when you’re trying to decrease the cost of making a t-shirt and you have to change materials to do that,” he says. Additionally, the improvements must be technological in nature, there must be some element of uncertainty, and there must be a process of experimentation and testing.
2. Companies that manufacture overseas aren’t entitled to credits. “As long as part or all of the design, development and testing is being performed in the United States, the company will qualify for the credit,” says Edwards. “Most companies that manufacture abroad are designing and testing the products here in the United States.”
3. Only companies that increase research from year-to-year can qualify. “Even though the tax form refers to the incentive as the “Credit for Increasing Research Activities”, companies should never assume they don’t qualify unless they have actually calculated the formulas,” Edwards advises. ”The federal credit includes the more recent Alternative Simplified Credit, which does not require an increase in research expenditure. Also, state credits often have unique formulas that don’t necessarily require increases in research, especially for companies that sell services or that sell products out of state.”
4. Credits will get denied in audit and the IRS will go after anyone that claims the credit. “People are afraid they’ll get flagged and audited if they take the credit, so they get nervous,” says Edwards. “But properly documented claims by research credit experts should result in a fair and straightforward audit. Most problems occur when business owners rely on less experienced staff, extensive use of time surveys, and high level estimates to capture qualified costs.” Yep, tax attorneys are typically pricier than a CPA but, says Edwards, “a tax attorney will typically analyze the amount of value the tax credit will provide ahead of time and base their fee on the amount of money saved. And you should not have to pay for that assessment.”
5. Non-technical companies don’t qualify. Many companies whose core business does not involve manufacturing or technology will still qualify for the credit if they are involved in developing or improving internal use software or if they are involved in projects to increase efficiency and productivity, such as improving distribution processes,” says Edwards. “For example, a retailer trying to optimize their supply chain, or a health care company creating add on software to help run the business would qualify.”
6. Taxpayers in AMT positions can’t benefit. “With the new Small Business Jobs Act of 2010, taxpayers with under $50 million in average yearly gross receipts over the preceding three years can now offset AMT and even carry back the credit up to five years to claim refunds,” says Edwards.
7. Taxpayers with Net Operating Loss (NOL) carryovers cannot benefit. ”Besides the features of the Small Business Jobs Act mentioned above, taxpayers should look to their state taxes for opportunities to save,” says Edwards. ”In California, for example, taxpayers are not able to use NOL carryovers for 2010 and 2011, but they can use R&D credits to offset those taxes.”