R&D tax credits are often overlooked or under-utilized dollar-for-dollar tax savings that directly reduce a company’s tax liability and/or offset payroll taxes. The R&D credit is available at both the federal and state level, with approximately 40 states offering an R&D credit to offset state tax liability.
Claiming R&D Tax Credits can be complex, as documentation is required to demonstrate how the underlying activities meet the four part test, federal and state tax laws and regulations are ever-changing, and a thorough review of the qualifying activities is required to determine eligibility. In some cases, companies can look back to all open tax years to claim missed R&D tax credit opportunities
At MGO, our dedicated R&D Tax Credit team brings over 30 years of experience. We will take a holistic view of your operations and research and development processes to identify areas where the R&D credit may apply.
Regardless of industry, companies are potentially eligible to save up to 15 percent of qualified research expenses if their activities meet the following requirements, known as the four-part test:
The purpose of the activity must relate to a new or improved product or process, formulation, invention, software or technique that results in increased performance, function, reliability, or quality.
The activity fundamentally relies on a hard sciences, such as engineering, physics, chemistry, biology, or computer science.
There must be uncertainty concerning the capability to develop, method of developing, or appropriate design of a new or improved product or process at the outset of the project.
Substantially all of the activities are undertaken to eliminate or resolve technical uncertainty. This process involves an evaluation of one or more alternatives and is performed through modeling, simulation, systematic trial and error, or other methods.
Costs related to R&D activities may be eligible to be expensed immediately to reduce overall tax liability. Qualified R&D costs can potentially include the following four categories:
W-2 taxable wages for employees involved in the R&D process.
Supplies used to conduct research may qualify.
Certain subcontractor expenses may qualify, contractual limitations apply.
This could also include payments made to cloud service providers if payments are related to hosting new or improved software.
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