The credit for increasing research activities, commonly referred to as the research and development (R&D) credit, is one of the biggest and best tax breaks available to manufacturing companies. Unlike a deduction, a credit is a dollar-for-dollar reduction of a business's tax liability. Plus, there's no limit on the R&D credit amount for a particular tax year and excess credit can be carried back one year and forward up to 20 years. Unfortunately, many manufacturers overlook this high-impact credit because they erroneously assume they don't qualify for it. If this is your business, a word of advice: Take a closer look. You may be able to claim a credit worth thousands of dollars.
The federal R&D credit is available to businesses that increase their qualified research and development expenditures. It can be claimed by manufacturing companies that are developing new products and processes — including prototypes, software and patents — that meet certain objectives. (Many individual states also offer tax benefits for R&D development.)
Under current federal regulations, companies need to meet the following requirements:
Finally, the research process must be "technological" in nature. This means it relies on sciences such as engineering, physics, chemistry, biology or computer science.
Many manufacturers overlook the R&D credit due to four widespread misconceptions:
Generally, manufacturers are allowed to claim a credit equal to 20% of qualified R&D expenses over a base amount. For this purpose, the base amount is a fixed-base percentage (not to exceed 16%) of average annual receipts from a U.S. trade or business, net of returns and allowances, for the four years prior to the year of claiming the credit. The percentage can't be less than 50% of a company's annual qualified research expenses. Thus, the minimum credit is equal to 10% of qualified research expenses.
Sound complicated? It is. A "simplified credit" is available. It's equal to 14% of the amount by which a company's qualified research expenses for the year exceed 50% of its average qualified research expenses for the preceding three tax years. For example, if your business has an average of $100,000 in qualified expenses for the prior three-year period, 50% of that amount is $50,000. If you incur $125,000 in qualified expenses in 2021, the simplified credit for the year is 14% of $125,000 minus $50,000 — or $10,500.
Note that although some estimates are allowed, your company must be able to document its claims. Hold on to payroll records, general ledger entries. project lists and notes, laboratory results and emails.
As previously mentioned, calculating R&D credits can be complicated. Don't leave the possibly of a major tax break to chance. Contact us for help assessing your company's eligibility and the amount you might be able to claim.
Get in touch today and find out how we can help you meet your objectives.