The Tax Cut and Jobs Act of 2017 (TCJA) eliminated many business deductions, but it didn't touch the research and development (R&D) tax credit, which was made permanent with the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act).
Although many businesses meet the qualifying criteria, small and midsize businesses often don't realize they can take advantage of this potentially lucrative dollar-for-dollar credit. Most businesses that design, develop or improve products, processes, techniques, formulas, inventions or software, however, can claim the credit. With some exceptions, like advertising and quality control expenses, R&D expenses are deductible to qualifying businesses.
Businesses in the following industries, among others, may qualify:
Service businesses such as nonprofits, accounting and law generally don't qualify for the R&D tax credit.
Some businesses wrongly assume they don't qualify because they don't believe they "make anything new." The rules, however, don't require companies to literally make something new to qualify for the credit. They require only that the credit is being claimed for something that is new to your company. That means finding a new way to produce your product using artificial intelligence or environmentally cleaner components may be enough to qualify.
The requirements can be complicated. Most states also offer an R&D credit.
How to Qualify
To determine whether your company can claim this credit, certain actions need to be taken, including the following:
Note that R&D documentation is critical. This is what the IRS and state taxing authorities will want to examine during an audit.
Claiming the R&D tax credit can be advantageous to your business if the necessary steps are taken and documentation is carefully maintained. Contact us today to determine your company’s eligibility.
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