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Understanding The Research & Development Tax Credit

 
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Angemeldet: 12.11.2020
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BeitragVerfasst am: 26.02.2021, 06:01    Titel: Understanding The Research & Development Tax Credit Antworten mit Zitat
Understanding The Research & Development Tax Credit - What Small Businesses Need To Know



It’s tax season, let the sales pitches begin! Tax return preparation companies and do-it-yourself software providers are hard at work convincing individual taxpayers that their services and products are the way to maximize a tax refund or pay the lowest amount of tax. And, judging by what I’m seeing on social media, companies that specialize in the Credit for Increasing Research Activities (also known as the R&D tax credit) are also selling hard, looking for businesses who may qualify for this credit—especially startups. They are casting an extremely wide net. While it’s true that the R&D credit is often overlooked by small businesses and their return preparers, it’s not as easy to qualify for the credit as some of these companies want small business owners to believe. Buyer beware.

For sole proprietorships, partnerships, and S-corporations the R&D credit is claimed by filing Form 6765 with the business return (Schedule C of a Form 1040, Form 1065, or Form 1120-S, respectively). Qualifying small businesses can elect an up to $250,000 payroll tax credit instead of an income tax credit. I’m not going to get into the mechanics of taking the credits here but it is easy to see how this election could benefit a startup in the early stages with payroll expenses and the associated taxes but not much income to be taxed. Nevertheless, the mere fact that a business is new or has a new product does not automatically make expenses qualified research expenses for the purposes of this credit.

Section 174 of the Internal Revenue Code allows a taxpayer to treat “research or experimental expenditures” as expenses instead of having to amortize them over 60 months. The R&D credit uses the same definition of research or experimental expenditures as IRC Section 174. Qualified research expenses are defined in Treasury Regulation 1.174-2. The expenditures must be “incurred in connection with the taxpayer’s trade or business” and must “represent research and development costs in the experimental or the laboratory sense.” The regulation goes on to state that “expenditures represent research and development costs in the experimental or laboratory sense if they are for activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product.” Additionally, qualification depends on the “nature of the activity to which the expenditures relate, not the nature of the product or improvement being developed.” It is on these semantic rocks that many tax credit ships have foundered.

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