What are R&D Tax Credits?
R&D tax credits generally deal with tax relief for research and development (R&D). In some cases, R&D tax credits allow for deductions, which lessen the amount of taxes due. In other cases, research and development costs are offset by sums of money awarded by a government.
In some countries, R&D tax credits are temporary. Many parts of each country’s tax code are considered permanent, although they may be adjusted from time to time. Research and development, however, is an area that can be introduced for a specific purpose, and therefore may only be relevant for a certain amount of time.
If a country observes that technology is generally lacking or lacking in a certain area, it may attempt to correct this by initiating R&D tax credits. Generally, the idea is to offer motivation for companies to invest in innovation. These initiatives are not always limited to large corporations or research institutions. In some cases, small and medium businesses are also eligible to participate.
The projects that qualify for R&D tax credits may be broadly or loosely defined. The idea behind these initiatives is typically to expand what is currently known or available. The eligible projects generally must extend the knowledge or capabilities in an area of science or technology. In some cases, research or development that was in progress before the initiative was announced may be eligible. It may be required that a certain amount of improvement or advancement be made, however.
Costs that can be claimed for R&D tax credits will vary. Salaries and wages for those employed for eligible research and development projects are normally allowed. The eligible salaries and wages are often strictly limited to people who actively contribute to the project. This means that money paid to a receptionist who works the company’s switchboard may not be allowed as part of the claim.
Companies are usually allowed to claim the costs of materials that they used for the project. These may be strictly limited to items that are directly used, such as raw materials and software. In other instances, companies may be given leeway to include items that indirectly contribute to a project, such as lab jackets and office supplies.
The amount that a company can claim often varies. In the UK for example, a R&D tax credit scheme allowed small and medium businesses to claim more than large companies. Some businesses may find that they will benefit if they choose to conduct research and development projects in a foreign country. Not all governments extend their research and development initiatives to foreign companies, however.
It's also important to consider recent IRS requirements for R&D credits, as this is now a Tier 1 audit item. A number of R&D service providers do no include the basic computations and work papers with the study reports they deliver to clients. This is something to inquire about when considering an R&D study.
That said, this is a great government program, and about 25 percent of U.S. companies claiming the Federal RD credit are very small, with total assets under $1 million. A much larger percentage of the total credits claimed are by companies still small with total employees under 100. My own firm, Tax Point Advisors, works with small to mid-size companies around the country - most companies are under $50 million in revenues and many are under $20 million.
This is an important part of stimulating jobs in the U.S., as companies which employee 100 or fewer workers account for about 70 percent of the workforce. And many of these companies can now qualify for R&D credits.
The R&D tax credit is the last defense to keeping jobs in America. If the R&D tax credit was eliminated not only would the U.S. be losing jobs overseas, we would lose innovation and new product development to overseas competitors as well. Congress needs to make this tax credit, which is a significant benefit to small and medium size manufactures in the U.S., permanent.
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