Are You Taking Advantage of the R&D Tax Credit?

Congress over the years has wisely invested in American companies by incentivizing innovation.  You may have heard of the R&D tax credit, as it has been around since 1981. What you may not know is that only one of every 20 eligible companies actually applies for the R&D credit – a mistake that can cost your business thousands or, in some cases, millions of dollars.

Who's eligible for the credit?

The R&D tax credit can benefit any company that designs, develops or improves products, processes, techniques, formulas, inventions or software. While you may associate R&D with laboratories, white coats and test tubes, in reality, the R&D credit has a broad application covering industries as diverse as manufacturing, architecture, engineering, agriculture and food production.

If you have invested time, money and resources toward the advancement and improvement of products and processes, your company probably qualifies for the incentive that brings in nearly $10 billion a year to U.S. businesses. For example, one of our manufacturing clients often customizes a product for specific customers. The company was delighted to learn that designing a product to customer specifications qualifies as an R&D activity.

If the credit is so valuable, why don't more companies take advantage of it?

One reason is that many taxpayers self-censor because they think that the credit doesn't apply to them or that it's too complicated to pursue. You can’t succeed if you don’t try – and that applies to tax incentives. 

Here are a few examples of qualifying R&D activities that are often overlooked:

• A client company spent time and effort developing a process to reduce manufacturing time. Developing the process qualified for the credit. The company sped up its manufacturing process and benefitted financially from the credit.
• If you are currently BETA testing a product, your testing qualifies now for the credit. Future BETA tests should be eligible for credits in the appropriate tax periods.
• Developing or improving software technology can qualify for the credit.
• Creating more environmentally friendly products or designs qualifies your company for the credit.

A second reason that companies don’t take advantage of the credit is that some businesses do not have accounting systems that will capture every qualifying activity. In this circumstance, it can be highly beneficial to have a qualified third-party conduct interviews and uncover documentation that supports claims.

Many types of work qualify

Simply put, if a company engages in practical problem solving or experimentation to improve a product or process, there is a good chance it qualifies. When it comes to R&D, applied sciences definitely count and the trial-and-error experimentation that occurs on the factory floor, as well as the modeling and prototyping taking place behind a computer screen, are as eligible as any other activity.  There can be substantial tax benefits for businesses making even the simplest of improvements to their products or processes, so it’s wise to take into account all of your qualifying activities.

With so many constant policy changes occurring to an already complex section of the tax code, it can be difficult for businesses to keep up with every individual change.  Qualifying for R&D requires both technical industry knowledge and experienced partners familiar with such a specialized section of the tax code.  A team should consist of accountants, engineers, software developers and scientists who have the experience and the technical capabilities to identify and maximize the R&D tax credits available to your company.

At our firm, we have helped taxpayers secure millions of dollars of credits in industries ranging from manufacturing to agribusiness to food service. 

Adding value

At its most basic level, the R&D tax credit is designed to reward innovation and job growth for American businesses. It is government-endorsed and a lucrative means of adding value to American businesses.  The initial R&D tax credit has now been expanded and extended with bipartisan support in Congress, and has the ability to help reshape and revitalize businesses and the American economy.  Money allocated to your business through the R&D credit could allow you to hire new employees, purchase new equipment, reinvest in your business and, ultimately, add to your bottom line.

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