About the Author
Monika Diehl serves as the VP of Operations for BioOhio member company Clarus R+D in Columbus, Ohio. She is a CPA and holds a Master of Taxation from Capital University Law School. Monika has extensive business tax experience and worked in internal audit earlier in her career. She is passionate about helping businesses use their investment in innovation to reduce the amount of tax they pay.
Regardless of how much we earn, which politicians we support, or what type of music we like to listen to, the one thing that unites pretty much all Americans is the desire for a lower tax bill. For businesses, large and small, it’s no different. And tax credits? They make this possible.
What are the two flavors of targeted tax credits?
A targeted tax credit is a benefit afforded to taxpayers that is designed to encourage (a.k.a., incentivize) a particular “economic activity,” like hiring additional workers or taking extra steps to protect the environment. These tax incentives generally come in two flavors – statutory and negotiated.
Statutory tax credits are available to companies based on their business activity. These tax credits are granted by law, meaning if you perform the activity you are entitled to the credit. Negotiated tax credits, on the other hand, are usually granted based on the promise of future activity, such as capital investment or job creation. The value of a negotiated credit fluctuates based on the presentation made to the presiding body and, in some cases, it can even be revoked.
Are these tax credits legit?
The short answer is yes, but they don’t always come easy to the little guy. One of the biggest issues isn’t the programs themselves. It’s the equal access, or lack thereof, that taxpayers have to them.
What is the federal R&D tax credit?
The most significant U.S. tax incentive in terms of sheer dollar amount is the R&D credit. With its origin in the early 80s, this statutory tax credit rewards companies for technology innovation. Big corporations have historically had the upper hand over small businesses in receiving its benefits, but recent legislative changes make the credit more accessible than ever before.
What is it worth?
The credit is worth up to 10% of qualified research expenditures. It can be used to offset payroll taxes, income taxes, or AMT, depending on certain characteristics of the company claiming the credit.
What work qualifies?
Many businesses perform activities for the R&D tax credit without realizing it. Examples of industries that often qualify include biotech, software development, agriculture, and more. IRS regulations outline a straightforward 4-part test that creates a fairly low bar for qualification.
1. Permitted purpose: Are you developing or improving a product, process, formula or software?
2. Technological in nature: Is your work within physical or biological sciences, engineering, or computer sciences?
3. Elimination of uncertainty: Are you asking “Can we develop it?” or “How do we develop it?”
4. Process of experimentation: Are you systematically evaluating one or more alternatives?
What expenses can be claimed?
Three types of expenses can be included in the credit calculation for your qualified projects: Wages, contract expenses, and supplies.
Wages are very often the largest component. Salaries paid to U.S.-based engineers, designers, and direct supervisors are all qualified expenses. A portion of payments made to U.S.-based contractors is also eligible. Supplies are non-capital/non-depreciable materials used or consumed in the development process, such as prototype materials.
For more detail, including an example calculation, download Intro to R&D Tax Credits (pdf). Or, estimate your company’s credit with this quick calculator. Then contact Clarus R+D to get this money you’ve already earned. Our technology-driven solution simplifies the process, maximizes your benefit, and reduces overall cost.