Claiming Your R&D Tax Credit
As a business owner, you may be missing out on potential tax reductions by not claiming the research and development (R&D) tax credit for your Georgia business. But what is this tax credit, and how can you apply for it?
In this guide, we will look at the R&D tax credit and provide details about how to apply for it, eligibility requirements and common documentation pitfalls to avoid.
How to Apply for R&D Tax Credits
Before we get into how to claim the R&D tax credit, let’s define it. The federal R&D tax credit is a benefit that companies receive for carrying out activities related to the improvement, development or design of software, techniques, processes, formulas and products. Initially, many believed this tax credit only applied to larger businesses with research and development departments. However, it also applies to smaller businesses in various industries. It allows them to access dollar-for-dollar reductions in their domestic expense liabilities.
Businesses can claim the R&D tax credit by filling out IRS Form 6765. Some industries that qualify for it include metal, chemical, manufacturing, architecture, pharmaceuticals, engineering, software development and aerospace and defense. A small business must either be a sole proprietorship, partnership or corporation not publicly trading its stock to be eligible.
Common Documentation Mistakes
It is important to be aware of best practices when claiming the credit, especially in areas where issues commonly arise. The following mistakes in documenting qualified research can result in missed opportunities and create problems if your company is selected for an IRS audit:
Lack of Supporting Documentation
R&D tax credit studies are at their weakest when they lack contemporaneous supporting documentation. Studies are often performed after the tax year is closed out. Some studies simply comprise a report that summarizes the findings and a brief description, if any, of the qualifying business component.
One of the objectives of an R&D tax credit study should be to answer a common question under audit: Why does this business component qualify? In order to properly address this question, it’s important to take a fluid approach to documentation. No two taxpayers are the same. No two projects are the same. As such, taxpayers may need to be creative in the identification of documents that show how projects meet the qualification criteria with specific emphasis on the presence of uncertainty and experimentation.
Information such as project records, lab notes, design drawings, photos of the design/build and testing trials, prototypes and patent applications are needed to corroborate customary R&D expenses. Having access to this information is especially helpful in the event of an IRS audit.
Informal Documentation Process
If a company is considering claiming the R&D tax credit for a project, it would be useful to implement a formal documentation process before beginning. Because many companies don’t understand who should be documenting, what they should be documenting and when the process should be occurring, it’s often left as a task to complete at year-end.
When this happens, a single person is often assigned the task of poring over hundreds of documents to find proof of qualifying expenses. The result is that expenses are often missed, and the potential credit value is diminished. To overcome this, a best practice would be to implement a process that collects relevant information on an ongoing basis, while the R&D activities are occurring. The more thorough the process, the greater the likelihood that qualifying expenses will be captured and used appropriately when claiming the credit.
Lack of Clarity
A common issue in the documentation process is that it’s unclear how the various expenses, personnel or other items relate to the R&D project. Remember that an IRS agent will not be familiar with your business, product or research process. Because they will be the primary judge of whether an expense qualifies toward the R&D credit, it’s essential to ensure the relationship between the expense and qualifying activity is clear.
Avoid incomplete or inadequate descriptions, general statements that sound canned, and documentation that is not clearly related to the project. The more you rely on an IRS auditor to figure out how your documentation supports expenses, the greater the risk of exposure.
Work With Marshall Jones to Keep Your R&D Tax Credits
At Marshall Jones, we provide a unique combination of personalized service and expertise, making us the ideal choice for R&D tax credit services. We understand how complex navigating the R&D tax credit can be, which is why we tailor our services to meet your specific needs.
We have a proven track record of successful claims across various industries, which sets us apart from our competitors. We take a comprehensive approach to capture all potential qualifying expenses and maximize the credit value. Furthermore, we employ proactive documentation strategies to help you avoid common pitfalls and prepare for potential IRS audits. Contact us today for a consultation.
