How to Claim R&D Tax Credits
Part four of our R&D series answers two common questions about the R&D tax credit:
- How do I claim the R&D tax credit?
- Do I really need to claim the credit every year?
One of the most persistent myths about the R&D tax credit is that the claim process is too complex to be worth it. While it does require extra supporting documentation, the backup you need can most often be found in routine business records you already keep. It might subject your business return to extra scrutiny but claiming an R&D tax credit will not automatically land you with an audit. The upside may be a very worthwhile reduction in your tax burden.
How to claim the R&D tax credit
To claim the R&D tax credit you file IRS form 6765 with your company’s tax return. The credit is referred to on the form as The Credit for Increasing Research Activities but it’s also known by other names in various publications. All of these popular references describe the same incentive that’s defined in Internal Revenue Code (IRC) Section 41:
- The Research Tax Credit
- The Research and Experimentation (R&E) Tax Credit
- The Research and Development (R&D) Tax Credit
Although it’s been revised and expanded many times, the credit has been in place since the early 1980s. Its purpose is to reward companies that invest in innovations leading to lasting job growth. It applies to a wide variety of businesses like manufacturing, architecture, construction, engineering and even retail – not just “big science” companies with expensive laboratories.
When you file your R&D tax credit claim, you’ll need documentation supporting your Qualified Research Expenses (QRE). These will include:
- The wages you paid to employees who were directly involved in qualified research activities
- The cost of supplies consumed during qualified research activities
- The cost of qualified research activities performed by third-party contractors
As mentioned in the previous article, there are two standard ways to calculate the amount of your R&D tax credit:
- The Regular Research Credit (RRC) method measures the increase in research investment in a taxable year compared with a defined base amount
- The Alternative Simplified Credit (ASC) method measures the amount your QRE exceed your average research and development investment over the three previous tax years
Business circumstances change from year to year. Choosing the method that yields the most benefit for your business is an annual decision you should make with the help of a qualified tax expert. Always consult a tax professional before implementing any tax credit strategy.
Do I really need to claim the R&D tax credit every year?
There are several reasons why it makes sense to evaluate the R&D tax credit every year:
- Companies that do file often overlook valid expenses they can claim. Completing an accurate analysis is easier during or immediately after the end of the year while the details of qualified activities are fresh in everyone’s mind.
- You can change your calculation method each year but must do so on the originally filed return. The calculation method cannot be changed on an amended return.
- Unused credits can be carried back one year or forward 20 years. Business processes typically change from year-to-year, which is why it makes sense to analyze the R&D tax credit annually.
An important thing to remember about the R&D tax credit is that it’s intended to incentivize experimentation. There’s no requirement that your innovation attempts must be successful or result in something new to the world. You just need to document your improvement efforts toward a product or process that’s better for your business using technology and science.
Interested in learning more about R&D tax credits?
Check out the rest of our R&D Roundup series:
- Your Guide to R&D Tax Credits
- What Expenses Qualify for R&D Tax Credits?
- How to Calculate R&D Tax Credits
If you’re considering the R&D tax credit for your business, or currently claim it but aren’t sure how IRS code changes might impact your tax return, we can help you explore your options, check federal and possible state eligibility and create a strategy to maximize the benefits of the credit for multiple tax years. Contact us today to learn more.