Within the administration’s documentation on plans for the coming 2017 fiscal year are provisions that could spell significant tax relief for many organizations. In an effort to stimulate economic growth and reward businesses for investing in research and development, Congress recently expanded the scope and availability of R&D tax credits. While a qualified CPA will give you specific details on how the new legislation affects your business, here’s an overview to show you where your organization may be able to apply these expanded credits.
What’s Changed with R&D Tax Credits
Research and development investments have historically earned businesses tax breaks, but the latest round of changes has increased availability to a wider range of industries and included more tech-based activities. Here’s what’s new:
- The R&D credit has been made a permanent fixture in the tax code; previously, it was provisional and needed regular review along with other extenders.
- The credit’s usefulness has increased as some small businesses can now apply it toward offsetting alternative minimum taxes and FICA tax.
- The scope of R&D programs has expanded to include investments in technology such as website design and software.
What Qualifies for R&D Tax Credits?
To qualify, activities must meet a four-part standard:
- The research, development, or experimental activity must seek to create or improve on a business component. Business components, in this case, include products, processes, formulas, and inventions intended for sale or internal use.
- Businesses must conduct activities designed to reduce uncertainty. Safety testing and reliability/maintainability testing are examples of this standard in action.
- The R&D process must be systematic. Experimental research only qualifies as research if it follows well-defined and documented procedures.
- Research also has to relate to science or technology in some way.
While R&D must meet these four standards to qualify for the credit, the tax code also contains exceptions. Your organization’s CPA can review your specific case, but typically, exclusions include reconfiguring existing business components; duplication or reverse-engineering of existing products or processes; market research and sales data collection; software meant solely for internal use; and research that takes place after commercial production begins.
What Types of Businesses Could Qualify for R&D Credits?
Businesses in science and technology sectors clearly have R&D programs that qualify, but they aren’t the only organizations that benefit. Architectural firms, engineering companies, and tech service providers may also have qualifying programs. Manufacturing companies working on new processes or greening their production facilities could qualify for R&D tax credits to cover feasibility research. If your organization is actively engaged in finding more efficient or effective ways to operate, the new R&D tax credits could apply to you.
To learn whether your organization qualifies or to learn about other tax credits that may benefit you, contact your New York CPA. Services such as eligibility reviews from a professional financial consultant ensure you get all the tax breaks and credits your organization is due.
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