Understanding the R&D Tax Credit Calculator

The Research and Development Tax Credit is an incentive to American businesses that innovate. It helps companies that develop processes and tools that improve productivity and the way businesses are done. Any tax paying business that develops, designs or improves products, processes, formulas or software qualifies. Through this initiative, the money that businesses spend on technology and innovation can help lower payroll and income tax liabilities.

Many businesses who qualify for this credit are not aware of its existence. They carry out their activities without the knowledge that their day-to-day activities qualify them for this tax credit. It is a fair assumption then that calculation of R&D tax credits is something most companies will struggle with.

At Wilkins and Co, we offer a Tax Credit Calculator to help answer your questions about your R&D tax potential. Our Tax Credit Calculator, coupled with the expertise of our team of tax professionals will guide you through estimating your company’s tax potential savings. We will also guide you through the filing process. Following is an overview of the Research and Development Tax Credits, the factors to be considered when claiming it and the process to be followed.

Essential Aspects of R&D Tax Credit Calculation

There are certain factors you will need to take into account when claiming your Research and Development Tax Credits. These are factors pertaining to eligibility of activities and a proper claim making process.

Defining Eligible Research and Development Activities

Which activities are considered eligible for research and development tax credits? If your business is involved in activities that improve products, processes or services through experimentation and research, you may be a candidate for the R&D tax credit. All types of business are allowed to apply provided they meet this criteria.

You are eligible to a R&D tax credit if your business activities fall into one of the following categories:

  • The activity is conducted within the US.
  • The activity is geared towards developing or designing products and processes that are innovative in nature.
  • The activity involves investing in improvements to products and processes.
  • Your activity comprises implementing new alternatives to design processes.

More specifically, these are a few of the activities that may qualify you for the R&D tax credit:

  • Research into new ideas and finding ways to apply your research findings.
  • Developing a product that is new to the market.
  • Designing and evaluating product alternatives.
  • Developing and modifying research methods.
  • Finding ways in which new technologies can be used to improve manufactured products.
  • Contracting third parties to do any of the jobs listed here.

Identifying Qualifying Expenditures for R&D Tax Credits

Once you have established that your activities may qualify you for a R&D tax credit, your next question will probably be about what goes into the calculation of a R&D expense and more importantly, which of your expenses are considered eligible for a R&D tax credit. Following are the main categories of R&D expenses used for tax credit calculation purposes:

  • Wages: Your payroll is one of the places where you will reap the most benefit from the Research and Development Tax Credits. Please note that the wages for which you claim must be those paid directly engaged to the activities for which you are claiming.
  • Outside consultants and contractors: If you choose to claim for amounts paid to subcontractors, you will need to keep in mind that you can only do this for those engaged within the US on research and development activities for which you are filing a claim.
  • Supplies: All the things that go into your research and development activity can be claimed. The hardware, raw materials, stationery and whatever other knick knacks you deem essential can be included in your claim.
  • If you had to lease or rent computers for your research and development activity then you can include that expenditure in your claim.

You can use our Tax Credit Calculator as a starting point to get an idea of the kind of figures you may be dealing with. You should note however, that the Tax Credit Calculator will give you estimates. The unique circumstances of your business will determine the actual figures. Contact our team of tax professionals for an assessment of your specific activities and advise of your potential benefits.

The Role of Documentation in Substantiating R&D Claims

It will benefit your company to correctly document your R&D activities. This is the first step to ensure eligibility for a claim. In the course of your research and development, assess and document your activities so that you have a true account of all costs incurred for each task related to the project. The documentation you should have will include:

  • Payroll records
  • Details of expenses
  • Project lists and notes of experiments, findings and progress reports
  • All other documents produced during the course of research and development activities

Maximizing Returns with an R&D Tax Credits Calculator

Navigating your way around a R&D Tax Credits calculation can be difficult. This is why it is advisable to engage a qualified tax professional. Remember, the Tax Credits Calculator we provide will provide you with an estimate. You will need guidance to calculate the finer details so that you can come up with an actual amount.

Strategies for Accurate R&D Expense Tracking

The best way to take advantage of the R&D Tax Credit provision is to file a claim that stands a chance of being approved. Such a claim will be dependent on your ability to present a record showing accurate and comprehensive expense tracking.

  • Your first strategy for accurately tracking your R&D expense tracking is to clearly define the business activities that you are involved in that fall under the definition of research and development.
  • The next strategy would be to put these activities into categories. You will need to define what constitutes direct expenses, indirect expenses and capital expenses. It will then become easier to track expenses according to the category they fall into.
  • Break your research and development activities into manageable projects. Track expenses for each of these projects and document them as a unit instead of doing so for the whole activity.
  • The final strategy for adequately tracking your expenses would be a regular review of your tracking process. This will help identify any issues and contribute to the improvement of your whole expense tracking process.

Leveraging Technology to Simplify the R&D Tax Credit Process

Applying technology to assist your business in tracking expenses will contribute to a more accurate result and ensure that your R&D Tax Credit claiming process is efficiently executed. The appropriate software tool will automate several tasks and simplify tracking. It can also integrate with your accounting and project management systems for a more rounded report on your expenses.

Common Pitfalls in R&D Tax Credit Estimation and How to Avoid Them

While estimating R&D tax credit for your business you should take care to avoid the following pitfalls:

  • Not understanding what activity falls under the definition of Research and Development.
  • Mixing up the types of expenses that can be claimed with those that cannot.
  • Documents with inadequate information as well as not presenting the full set of documents as required.
  • Not making claims within the stipulated period.
  • Not seeking professional advice and guidance.

Practical Insights into R&D Tax Credit Utilization

Sector-Specific Considerations for R&D Tax Credits

Normally eligibility to claim R&D Tax Credits is not determined by the sector a business belongs to. The main determining factor is the activity that the business is involved in.

The Impact of Legislative Changes on R&D Tax Credit Eligibility

Recent legislative changes have made it possible for businesses involved in research and development activities to realize a return on their investment (ROI) faster than in the past when companies had to wait until they were profitable to do so. Companies can now apply for credit against their payroll taxes and get the tax credits in the same fiscal year.

- Case Examples: Real-World Applications of R&D Tax Credit Calculations

Smirta is a company involved in optimizing operations of cancer treatment clinics. By applying cutting edge technology to simplify scheduling, they also improve the quality of care and resource management. Their R&D efforts resulted in better management of cancer treatment. They were able to access more funds to support their technology by filing for a R&D tax return.

FAQs: R&D Tax Credit Fundamentals

How does the R&D tax credit benefit companies?

Through this initiative, the money that businesses spend on technology and innovation can help lower payroll and income tax liabilities.

What expenses qualify for the R&D tax credit?

  • Wages.
  • Outside consultants and contractors.
  • Supplies.
  • Leasing or renting computers for your research and development activity.

How can businesses ensure accuracy in R&D tax credit calculations?

Working with a qualified tax professional is the best way to ensure your R&D tax credit calculations are accurate.

Advanced Topics in R&D Tax Credit Calculation

Navigating State-Level R&D Tax Credit Variations can be a daunting task. Your company will need the expertise and guidance of a team of tax professionals and seasoned accounts. Contact us at Wilkins and Co for customized solutions to your R&D Tax Credit queries.