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Do Your Research Expenses Qualify For R&D?

April 14, 2015

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If your business has engaged in any of the following endeavors, take seriously the R&D tax credit opportunity that the federal code offers. Qualified expenses include wages, supplies and contract research that support:

  • Development of new or improved products
  • Creation of software applications
  • Advancement of your manufacturing process
  • Engineering and design of fabrication and/or production equipment

However, the government is certainly not handing these credits out on a silver platter. They have purposely set the bar high. To be claimed, the R&D activities you have funded must pass the following four qualifications with an affirmative answer.

  • Are they related to your business component’s new or improved function, performance, reliability or quality?
  • Are they meant to eliminate uncertainty? Specifically are you seeking clarity regarding the capability or method by which you develop or improve a product or process? Are you testing the appropriateness of the product design?
  • Are they part of a process of experimentation that includes the evaluation of alternatives; the confirmation of hypothesis through trial and error, testing, and or modeling; and the refinement or elimination of the hypothesis?
  • Do they rely on the principles of physical science, biological science, computer science or engineering?

If the above standard can be met, then documentation of your qualifying activity is of primary importance, because it will be needed for your credit application. Keep diagrams, spreadsheets, and all notations of experimentation. Your reporting should include the time of any employee actively involved in research and development, down to the project they are working on and when they work on it. For instance, you can utilize 100 percent of a person’s wages toward the credit if you can demonstrate that at least 80 percent of their time is spent on qualified R&D. As you document your initial activities, simultaneously establish internal procedures that track, record and verify all future qualifying expenses so that you can validate future credits.

Further resources for understanding the R&D tax Credit:

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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