Taxes are complex as there are layers of provisions, policies, and guidelines that should be complied with in computing tax liabilities and more so when it is the taxation of businesses and enterprises. Most companies would have a dedicated group of accountants, auditors, and lawyers who specialize in taxes to be able to cope with the quarterly filing of various taxes. On the other hand, there are several programs and reliefs that the government has instituted to provide business owners with reduced federal income tax in the form of tax credits. There are several tax credits available to businesses such as the R&D tax credits which were specifically designed to help companies lower their tax liabilities when they engage in research and development activities and expenses related to the development of new and improved processes, systems, techniques, products, and preparations. Companies can qualify for the tax credit if they have a well-developed research and development action plan that demonstrate the activities devoted to it and when the company has paid for these activities. The computation for the amount of tax credit is based on the research and development activities and expenses of the company, and the great thing is that there is no limit to the amount of R&D tax credit that can be claimed by the company in a given year. So that the more research and development activities and expenditures the company has, the greater the tax credit amount can be applied. However, the R&D tax credit is non-refundable, which means that any tax credit not used in a given year cannot be refunded but can be carried over to the next twenty years. This means that the company can make use of the credits for the coming years and this will help lessen the tax liabilities each year. Moreover, the company can claim R&D tax credits from previous filings for up to 3 years to amend their filings and this can even be extended for valid reasons. For example, if the company had no prior knowledge of the R&D tax credits but did have research and development activities and expenses and filed their taxes without it, then they can amend their tax filings to reflect the R&D tax credits even after 3 years from the date of filing.
How to file R&D Tax Credits?
To file a claim for R&D tax credits, the company has to file its tax return on the given period promptly including the tax extensions. On the other hand, it can also be claimed through amended returns up to 3 years of previous tax returns. The company has to use the IRS Form 6765 which is the Credit for Increasing Research Activities during the taxable year in which the research and development expenses were reported. As there is no limit to the amount of R&D tax credits to be claimed in a given year, all expenses that can be justified as R&D related can be included. For sub-corporations, other businesses, and even LLCs the tax credit is awarded to the shareholders on their filings of their Schedule K1. In cases when the company acquires or disposes of a business entity, then the calculation of the R&D tax credits for the same year it was acquired or disposed of should also be included in the tax returns of the current year. Also, the new business enterprise’s R&D expenses should be included in the base period years.
How do compute R&D Tax credits?
When a company files for R&D tax credits, it should also compute the credits they are entitled to based on the expenses incurred for research and development in the current year. Then the tax credit is directly applied to the federal tax liabilities of the company which usually results in the reduction of the number of tax dues. Unused credits in a given year can only be carried forward, which means that they can be used in the coming years to reduce the tax liabilities for up to 20 years. Before the company can file for the R&D tax credits, it has to pass the four-part test that the IRS had established for taxpayers, which should be applied to each of the business activities of the company. The company has to study the Internal Revenue Code (IRC) §41(d)(1) which describes the four tests and all must be passed for the company to be qualified for the credit. Moreover, the company must be responsible for the financial aspect of the development and owns the rights to the conducted research. To compute the R&D tax credits due to the company, it must decide between the Regular Credit Method or the Alternative Simplified Credit Method. The two methods are included in IRS Form 6765 and the company can choose which one to use when preparing the tax returns. Each computation method has its advantages and disadvantages; hence the company should know which one will be more beneficial to them, also because once the method had been identified in the filed tax returns, it can no longer be changed in any amendment or in succeeding years. To identify the qualified expenses for the research activities, one can look into the payments for trainers, facilitators, designers, supplies used in research activities, and taxable wages of employees involved in research and development planning and implementation.
Why Hire R&D Tax Credit Consultants?
Preparing the documentary requirements and passing the four-part test to qualify for R&D tax credits can be a daunting task and the company needs a team of experts who can point them in the right directions. The best way to do this is to hire a team of consultants who will conduct a feasibility study and then compute the estimated R&D tax credits due to the company. The consultants will interview the key personnel or staff involved in the research and development activities of the company, this will take anywhere from 10 to 20 minutes for each concerned employee, the more organized the company is, the more likely that the consultants will be able to do their job faster and more efficiently.