4 Common Misconceptions About the R&D Tax Credit

4 Common Misconceptions About the R&D Tax Credit

Research & Development (R&D) tax credits are for companies developing new or improved components or products. Developing prototypes, models, improving software and creating a new production process are all examples of qualified research expenditure activities to qualify for the credit. If companies qualify, they should take advantage of this credit. However, there are a few misconceptions about R&D that make companies hesitant.  

 Misconception #1: The innovation or qualifying activity must be “new to the world” or one of a kind.  

Regulations were proposed in 2001 and then finalized in 2003 to eliminate this “Discovery Rule” which now means that the activity only has to be “new to the taxpayer” to qualify. 

Misconception #2: Only companies with scientists conducting research will qualify for the R&D Tax Credit.  

The definition of R&D within Section 41 of the Internal Revenue Code has expanded since it was first enacted in 1981 to include all the hard sciences such as engineering, physics, chemistry, biology and computer science. 

Misconception #3: Our pass-through business and shareholders are subject to Alternative Minimum Tax (AMT), so we can’t benefit from the R&D Tax Credit. 

Starting in 2016, the R&D credit can now be used to offset both regular and AMT taxes if the pass-through business is an Eligible Small Business with average gross receipts of $50 million or less over the previous three years. 

Misconception #4: If my company takes the R&D Tax Credit it will be audited.  

The Federal government made this credit permanent in 2016 to incentivize companies to spend money domestically to perform these types of activities. They want companies to take advantage of the credit, so it doesn’t automatically raise a red flag with the IRS. However, the possibility for an audit still exists which makes it critical to properly document everything required to claim the credit.  

Businesses should not attempt to claim the credit without professional help. An experienced tax advisor in R&D Tax Credit calculations, will allow companies to receive help evaluating, preparing and defending their R&D Tax Credit claim, along with being able to maximize the credit and cash flow savings. Contact your tax advisor at Brown Plus if you have any questions. 

Posted In: Tax | Research & Development Tax Credit | Insights

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