A tax credit is an immediate source of cash, as well as a significant reduction to current and future years’ federal and state tax liabilities
The Research and Development (R&D) Tax Credit remains one of the best opportunities for businesses to substantially reduce their tax liability. For what amounts to their daily activities, companies from a wide-range of industries can qualify for federal and state tax savings high to enough to allow companies to hire new employees, invest in new products and service lines, and grow their operations.
Now, due to numerous modifications and expansions over the years, more companies than ever before can benefit from this valuable incentive.
What is the R&D Tax Credit?
The federal R&D tax credit has been a part of the tax code since 1981, rewarding businesses in a wide variety of industries for making improvements to their products, processes, or techniques. The credit is designed to encourage the American industry to invest in research and development activities including but not limited to design, development, engineering, experimentation, trial and error, process improvement, software development and improvement, quality assurance and more. This wage-based credit is intended to stimulate R&D activities among businesses through tax incentives.
The federal credit (and the 43 state versions of the credit that have risen over the years) essentially reward those companies that are thinking bigger and better about their products or services, providing valuable tax credits for their R&D investment. Currently, the R&D tax credit and other related tax breaks save U.S. businesses more than $12 billion a year, as noted in the Washington Post.
Certainly, an impressive figure—and one that would be even larger if all eligible businesses in all qualified industries applied for the credit. The R&D credit is one of the most overlooked opportunities afforded to U.S. businesses, with most eligible companies (and, in many instances, their CPAs) self-censoring away from the credit.
Anytime a business makes changes to the design or development process to make it cheaper, greener, cleaner, better, and quicker, the business could be earning tax credits. This tax credit can be applied to both new product development as well as the production side of manufacturing, software development, fabrication, machine shops, agriculture, architecture, biotechnology, as well as a broad range of other industries. These dollar-for-dollar credits can make a positive impact on your bottom line.
Our financial tax team has vast experience in structuring these credits for our clients.
How do I claim the R&D Tax Credit?
A number of factors go into claiming the credit, but the potential savings on the table make exploring the credit a worthy investment. Since the credit may be claimed for both current and prior tax years, companies can benefit from documenting their R&D activities to ensure they are positioned to claim the credit in both situations.
To claim the credit, the taxpayer must contemporaneously evaluate and document their research activities to establish the amount of qualified research expenses paid for each qualified research activity. While taxpayers may estimate some research expenses, they must have a factual basis for the assumptions used to create the estimates.
Examples of such documentation includes:
- Payroll records
- General ledger expense detail
- Project lists
- Project notes
- Other documents a company produces throughout the regular course of business
These records combined with credible employee testimony can form the basis of a R&D Tax Credit claim – and our comprehensive services can quickly identify and gather this information to substantiate your claim, ensuring you are receiving the full value you are entitled under relevant IRS guidelines and Treasury regulations.
The Benefits of the R&D Tax Credit
- A hidden and immediate source of cash for many small and mid-size companies.
- Creates a significant reduction to current and future years federal and state tax liabilities.
- The R&D Tax Credit is not a deduction; it is an actual dollar-for-dollar credit against taxes owed or taxes paid. Additionally, the taxpayer may be able to expense all such qualifying R&D costs in the year incurred.
- More than $16 billion in federal R&D Tax Credit benefits alone are given out annually.
- Approximately 80% goes to a few of the nation’s largest companies.
- Every successful company is potentially eligible for an R&D tax credit of some amount.
- A business can take the credit for all open tax years, generally the last three or four years plus the current year.
- Additional years may be available if taxpayer is in a net operating loss or alternative minimum tax position.
- Tax credits may carry forward 20 years.
- Recent tax laws are taxpayer-friendly and bring additional benefits.
- In addition to the federal R&D Tax Credit, many states offer a state R&D Tax Credit as well.
What Qualifies as R&D?
We have found many of our clients regard their own efforts to make new, lighter, stronger, cheaper, more reliable products, or to make more precise, more economical, and more versatile processes as “just doing my job,” when in fact they have been performing R&D qualifying activities all along.
If your company is involved in any of the following activities, you may be able to claim the R&D Tax Credit:
- Developing an innovative product that is new to the market
- Engineering and designing a new product
- Conducting research aimed at discovering new knowledge
- Searching for ways to apply new research findings
- Designing product alternatives
- Evaluating product alternatives
- Introducing significant modifications to the concept or design of a product
- Designing, constructing, and testing preproduction prototypes and models
- Engineering activity to advance the product’s design to the point of manufacture
- Utilizing systems processing modeling
- Conducting system and functional requirements analysis
- Utilizing integration analysis
- Experimenting with new technologies
- Experimenting with new material and integrating the material to improve manufactured products
- Engineering to evaluate new or improved specification/modifications in terms of performance, reliability, quality, and durability
- Developing new production processes during prototyping and preproduction phases
- Conducting research aimed to significantly cut a product’s time-to-market
- Conducting research aimed to obtain more efficient designs
- Developing and modifying research methods / formulations / products
- Paying outside consultants / contractors to do any of the above activities
What Industries Qualifies For R&D Tax Credit?
Businesses in many different industries routinely do work that qualifies for significant business development credits, rebates, and rewards as they attempt to create products that are lighter, faster, less expensive… or more durable, reliable, or precise. As the pace of your business accelerates and competition increases, you may be more likely to overlook this source of cash because you lack the time, resources or expertise needed to identify and manage tax credit claims.
Let UBOS/BIS industry experts help you claim the credits that you deserve!
- Paper and Forest Products
- Chemicals and Plastics
- Construction and Engineering
- Consumer products
- Oil and Gas
- Food and Processing
- Entertainment and Media
The R&D credit is one of the most overlooked opportunities afforded to U.S. dental practices, with most eligible dentists (and, in many instances, their CPA’s) self-censoring away from the credit.
While many associate the research and development (R&D) tax credit with the technology, aerospace/defense and pharmaceutical industries, the dental industry is often overlooked as an area for potential R&D credits. While identifying and documenting qualified research activities and expenditures taking place in dental practices is generally more difficult than in traditional R&D-intensive industries, it can be well worth the effort for dentists that perform certain types of activities. Because not all activities qualify, it is important to understand the R&D credit qualification criteria sufficiently to determine whether your dental practice has enough potential R&D activity to warrant further investigation.
Many dental practices, oral surgeons and dental labs perform qualified research as part of their project activities. Qualified research is most often found in activities that present one or more technical challenges that must be overcome. The dental practices that provide the best credit opportunity are the ones that perform new and improved procedures, as well as using new, improved, or upgraded equipment or technology.
If you think you must be operating in a laboratory to qualify for R&D tax credits as defined by the Internal Revenue Code, think again. If you are in the dental industry, there is a strong chance that you could benefit from an R&D Tax Credit study.
“Research and development” go far beyond test tubes and petri dishes. It’s a lesson all businesses should take to heart, but particularly manufacturers.
Many manufacturers fail to apply for the credit as they deem their internal testing as unworthy of reward. This is false, especially considering how a contract manufacturer routinely receive federal and state credits for developing prototypes for production design parts.
While scientific experimentation is nice, it’s not for putting a man on the moon—applied sciences definitely count, and the trial-and-error testing completed on the factory floor is just as valid as that occurring in a lab. If a company is improving a product or improving how to make a product, it’s all eligible. The R&D credit was designed by Congress to keep well-paying jobs in the United States, not to lead to a massive increase in patent applications. Small and medium-sized business owners frequently think that only Nobel Prize winners and rocket scientists should bother applying for the R&D credit.
While this incentive can be of extreme benefit to manufacturers, it is also complex, and fully identifying the proper substantiation for capturing the various credits requires a deep understanding of the tax code. BIS’s practical experience in the disciplines of manufacturing engineering, industrial engineering, mechanical contracting, tool and die and ….. to work alongside our clients ensuring optimal results.
“Instead of tax loopholes that incentivize investment in overseas jobs, I’m proposing a more generous, permanent extension of the tax credit that goes to companies for all the research and innovation they do… right here in the United States of America.”
– President Barack Obama
As incentive tax credits are dollar-for-dollar, common sense would dictate that companies within the healthcare industry with skilled, highly paid employees would be the greatest beneficiaries. With higher wages and employee work hours that can be tied directly to eligibility, incentives such as the R&D credit are tailor-made to reward the daily innovation, software, and technology developments in the healthcare industry.
Healthcare technology and software development go hand-in-hand with R&D and other government-sponsored credits, and now is the time for healthcare professionals to take advantage of the benefits. Examples of qualified activities for the healthcare industry that may be eligible for R&D tax incentives include:
- Cold Lasers
- Digital Motion X-Ray
- Diagnostic Thermal Imagers
- Treatment Protocols
- Granston GT
- Cox Flexion
- Atlas Ortho
- New Procedures
Several Electrical based treatments: electrodermal screening, electromyography, electrical nerve stimulation, Interferential current, electrical impulse adjusting
- Thermography – state of art radiation free screening using infrared waves
- Radiofrequency Rhizotomy – apply heated radiofrequency waves
- Diagnostic Thermal Imaging – scanning of the nervous system
- Therapeutic Ultrasound
- Dry Needling
For more than a century, the construction industry has been considered the “backbone of America.” And yet, most construction companies are simply unaware that there are state and federal government programs that offer lucrative research and development (R&D) incentive programs. Other companies are aware of the R&D Tax Credit but fail to take full advantage due to misunderstanding the types of business behaviors that qualify.
The reality is that a broad range of common construction industry practices will qualify for the credit under the Internal Revenue Code’s definition of R&D. Research and development is not limited to the work of scientists wearing lab coats. Construction industry specialists, engineers, designers, and machinists often spend a substantial portion of their time developing superior designs and manufacturing practices in an effort to remain competitive. These continuous activities provide substantial opportunities for companies to take advantage of available credit and incentive programs.
If your company is in the construction industry and is involved in any of the following activities, you may be able to claim the R&D tax credit:
- Exploring means and methods and construction techniques
- Preparing structure and facility design for constructability
- Developing and improving construction equipment development
- Designing LEED/green initiatives; Designing HVAC systems
- Analyzing the functions of a design directed at improving performance, reliability, quality, and safety
- Performing Request for Information Process (RFI’s)
- Improving mechanical equipment sizing
The economy is growing, which means the heat is on for all HVAC contractors residentially and commercially across the United States. With the economic growth comes commercial business growth as well as housing, both of which need heating and air conditioning units. Contractors in the heating, ventilation and air conditioning (HVAC) industry are constantly striving to improve new processes and products to keep up with technology and architectural trends, as well as their competition. Does your HVAC company resolve technological challenges through the innovative use of products and processes? For example, a client hiring an HVAC contractor may have a need to develop and deploy technologies that can substantially reduce their energy consumption. The contractor must then begin researching their current processes and then begin developing better more cost-effective products or processes along the way. These everyday developmental activities HVAC contractors are performing are deemed pertinent R&D.
Most contractors in the construction industries, including HVAC companies, don’t know that their day-to-day activities can qualify them for federal, and in some cases state, R&D tax credits. Listed below are examples of the types of HVAC activities and projects most likely to contain qualified research:
- Improving overall process to increase efficiencies
- Pre-construction planning
- Testing mechanical system performance
- Conducting building information modeling (BIM) for coordination with various systems
- Value engineering
- Developing means, methods and fabrication techniques for sheet metal
- Improving installation means and methods for alternative components and materials
- Designing systems for better airflow and energy efficiency
- Designing electrical systems for efficient power usage
- Water drainage and management
- Designing systems for better air filtration and humidity
Many of the activities conducted by HVAC companies qualify for the R&D tax credits, and the HVAC companies conducting these qualified activities can benefit greatly from these tax incentives
ARCHITECTURE and ENGINEERING
A&E firms are in a great position to claim federal and state Research and Development (R&D) Tax Credits. As one of the most R&D intensive industries in the nation, A&E is also one of the most far reaching. The architectural industry is connected to over 18 percent of the US GDP and 20 percent of all American jobs. Many of the activities required to design and construct a new building, expand and improve an existing structure, asses the suitability of land and soil conditions, and provide general consulting and engineering services often qualify for R&D Tax Credits.
Most activities performed by project architects, engineers, and other design consultants are R&D intensive under the current tax law guidelines. Developing new or improved designs, assessing designs through various forms of modeling and computational analysis, structural engineering, and design of MEP systems are all activities that generally qualify R&D Tax Credits.
Other activities that typically qualifying include the consideration of different building materials, the selection of equipment, and the improvement of construction processes for increased efficiency and reliability. R&D Tax Credits are available to help support and stimulate innovation for architectural and engineering firms engaging in activities such as these.
The following are examples of qualifying activities:
- Developing new or improved designs
- Evaluating alternative designs to meet or overcome complex client requirements, site conditions or building codes
- Evaluating alternative designs and materials to optimize for energy efficiency and/or achieve LEED certification
- Determining optimal designs for lighting or acoustical qualities within a structure
- Using building information modeling and computational analysis tools to assess designs for various functional requirements
- Developing schematic designs
- Developing site plans, planning and elevation drawings
- Designing areas for building systems
- Developing environmentally friendly buildings
What Are Qualified Activities for R&D Tax Credit?
The new research and development tax credit legislation allows businesses in over 40 industries to claim qualifying activities. Some of these verticals and eligible operations may include:
- Experimenting with new defining specifications and design concepts
- Engineering new processes and products
- Enhancing existing product design
- Enhancing production or manufacturing practices
- Creating manufacturing plans
- Simulating, engineering, modeling, and analyzing new processes or products
- Creating specialized tooling and equipment used in the production process
- Developing, creating, and testing prototypes
- Examining sufficiency of a new or improved design
- Developing software technology for customer and/or vendor interaction
- Evaluating and integrating new technologies and materials
- Creating and producing new or enhanced technologies
- Engineering new and innovative structure designs
- Creating new or improved products, systems, or materials
- Developing new or improved tooling, machinery or equipment
- Using CAD technology and BIM activities
- Conducting scientific computations to assess physical properties of materials
- Evaluating alternative design materials, methods, and subcomponents
- Inventing or enhancing LEED or energy-efficient systems and structures
- Designing and developing new or enhanced infrastructure components including dams, subsurface tunnels, rail systems, and bridges
- Designing and developing new or enhanced pump facilities, wastewater treatment stations, or other water supply stations
- Creating or improving control, communication, lighting, alarm, and electrical systems
- Creating or improving mechanical, building envelope, and HVAC systems
- Evaluating subterranean conditions and a multitude of related development and design efforts
- Experimenting with new or enhanced designed for use in testing and evaluation practices
Aerospace & Defense
- Creating new or improved manufacturing procedures
- Designing new customer components
- Developing new composite materials
- Generating testing and validation prototypes
- Producing new machines, tools, fixtures, and jigs for aircraft assembly and manufacturing
- Creating new or improved welding, machining strategies, metal forming
- Automating various processes
- Designing engineering plans or integration kits
- Improving design or development of new or existing components or monuments
- Creating new software
- Experiment to improve output / reduce cycle periods
- Invent new surface-hardening solutions
- Creating new field/warehouse processes
- Inventing specialized harvesting and manufacturing tooling
- Developing new hybrids for livestock, plants, or crops
- Changing harvesting techniques to improve harvest or yield efficiency
- Automating processes
- Updating or enhancing pest management
- Designing or utilizing new irrigation systems
- Developing new or improved packaging or preservative chemicals
- Improving soil and root-stock processes
- Designing new software
- Utilizing new or improved functions to design clothing and accessories
- Inventing apparel innovations that may qualify for utility patents
- Creating new product and performance specifications for fabric and materials construction technologies
- Using new apparel technologies and materials in new or improved clothing designs
- Invent new manufacturing practices
- Producing and testing prototypes and samples
- Designing new industry-related or process-oriented software
- Innovative or unique designs for various structures
- Computer-aided design(CAD) and computer-aided engineering (CAE) activities
- The design and development of innovative or unique new LEED, energy-efficient, or “green” alternatives
- Assessing design through various forms of modeling and computational analysis
- Designing infrastructure utilizing green and solar technologies
- Designing a wastewater treatment plant
- Designing water and sewage systems in complex environments
- Developing solutions to infrastructure challenges
- Developing solutions around potential environmental issues
- Designing roads, bridges, and tunnels
Communications and Media
- Creating or expanding network technology/architecture
- Algorithm development for dynamic Web applications
- Development of data analysis technologies and tools using new algorithms
- Conceptualize and build physical system networks
- Designing cloud-based platforms
- Expansion of telecommunication networks to better serve customers
- Design and testing of enhanced automation methods
- Developing transceivers, software, network tools, applications
- Firmware development
- Network security design
- New infrastructure design
- Establishing production process for new products
- Creating new or existing devices, diagnostics, and pharmaceuticals
- Producing experimental clinical trial pharmaceutical lots
- Enhancing factory process or production using innovative methods or new technologies
- Designing technology to comply with EPA requirements
- Creating software or hardware components for research and clinical development use
- Developing medical equipment for use in research practices
- Improving product stability or increasing product shelf life
- Producing new medical products, equipment, technology, or devices
- Producing next-generation products and product enhancements
- Conducting unit, functional, integration, and performance assessments
- Designing, testing, and enhancing code for firmware
- Utilizing CAD technology for new product development
- Developing and testing new product validation prototypes
- Testing products and processes to comply with both domestic and foreign regulatory mandates
- Developing software technology for customer and/or vendor interaction
- Programming software source code
- Compiling and testing source code
- Designing and developing the software
- Developing new or improved technologies
- Evaluating and establishing functional specifications
- Programming of control systems
- Developing schematic drawings for integration of system components
- Provide custom control solutions for different applications
- Developing new software algorithm or architecture code
- Engineering new capabilities or functional upgrades for existing technology to establish competitive advantage
- Developing intranet and Internet software with complexity and scale to create technological challenges
- Creating technology to manage and automate complex business models and structures
- Designing interactive technology used in multimedia entertainment, including Internet video games as well as
- music or video streaming
- Developing software technology for customer and/or vendor interaction
- Inventing specialized innovations, including voice recognition or artificial intelligence technology
Tool and Die
- Prototyping and 3D solid modeling
- CAD design of die prints
- Optimizing manufacturing processes
Wineries And Vineyards
- Creating or improving distillation and fermentation processes/equipment
- Producing custom manufacturing equipment
- Designing or integrating automated processes
- Producing new irrigation, filtration, or straining systems/methodologies
- Creating or enhancing bottling and packing procedures
- Creating or enhancing product formulations and preservative chemicals
- Creating or enhancing prototype lots
- Evaluating and improving product consistency and shelf life
- Investing in green technologies for the use of manufacturing
- Developing software technology for customer and/or vendor interaction
R&D Tax Credit FAQ
I Don't Think My Company Invents Anything, Can I Still Qualify?
With the changes throughout the years to the qualification rules, more companies than ever before can now take advantage of the R&D tax credit. Essentially, the credit is designed to be a driver of innovation and improvement of processes – so if the projects that your company is performing aren’t all exactly the same, then it’s extremely likely that your company would qualify for the R&D credit.
Why Does The Government Offer The R&D Tax Credit?
The intent of the credit is to encourage companies within the U.S. to keep technical talent within the country while simultaneously continuing to drive innovation. This keeps not only your company, but the country, competitive both domestically and internationally.
I Have A CPA, Why Haven’t I Heard Of This?
Even though the credit has been around since 1981, the credit has gradually evolved over the years, with many companies not even able to take advantage of the incentive until the changes that were made in 2015. Due to its gradual evolution over the years, many CPAs may not be up-to-date on the most recent policies and regulations regarding the credit. We have partnered with thousands of CPA firms in the past and have been able to assist them in providing this service for their clients.
Does My Company Need To Be In A Specific Industry?
Nope! There are hundreds of industries that qualify for the credit as it is fact specific to your everyday activities and work projects.
This Sounds Too Good To Be True. Is It?
Not at all! Fortune 500 companies have been taking advantage of the credit for decades, and now with the recent changes, more small to medium sized businesses than ever before are claiming the credit. But even with the increase in claims, only 5% of companies that qualify for the R&D Tax Credit are taking the time to do so.
Why Should I Partner With UBOS/BIS For This? Can’t I Do This Myself?
While the credit is available to businesses to take advantage of, the IRS isn’t simply handing out credits. UBOS/BIS has industry focused professionals, who understand and identify the key activities of your business that qualify. More often than not, companies who have claimed the credit on their own are not claiming the full value they are entitled under the tax code. It’s hard to stay abreast on all the changes within the credit, as it has changed more times in the last 5 years than in the previous 30.
I Already Claim This Credit, Why Should We Revisit This Credit?
After claiming the credit, do you still have tax liability? If so, then it’s worth having our industry experts take a second look as it is commonplace for us to find 3-4 times as much as previously claimed. Regardless, with something as important as your business and financial well-being, it would never hurt to take a second look to ensure your company is receiving all the full value you are entitled from the credit.
Is This Worth My Time?
Absolutely. Since the changes in legislation and tax reform, the R&D Tax Credit remains one of the most valuable incentives offered by the U.S. government for businesses to remain competitive.