R&D Tax Credit and Why You Need to Apply

The R&D Tax Credit: Overview

Who Is Eligible

What Expenses Can Be Claimed

  • Wages paid to the employees who conducted the R&D activities;
  • Supply and material costs related to the R&D, including prototype models;
  • Contract costs — if a third-party contractor was hired to conduct research for your company;
  • Computer leasing — if you have used cloud services to perform research or experiments.

What Activities Qualify

  • Seek to discover new information and eliminate technical uncertainty. In other words, the research should reveal new knowledge about product development or improvement. For example, QA activities or market research will not qualify here.
  • Involve experiments.
  • Be technological in nature and based on the hard sciences (from physics and chemistry to engineering and computer science).
  • Have a qualified purpose, such as creating or improving an existing product or process.

What You Need to Do

  • Collect records to demonstrate your R&D activities (preferably at the time when they are carried out). This documentation might include lab reports, patent claims, experiment descriptions, protocols and logs, etc. Relevant internal emails could also be useful here.
  • Implement employee timesheet to facilitate project time tracking. Since wages constitute the largest part of most tax claims, it would be a good idea to pay extra attention to this type of documentation. Standard payrolls is not enough: you will need to demonstrate how your labor costs are connected to the R&D activities. That’s where a detailed breakdown of working hours by projects could come in really handy.
  • Keep your contract agreements. If you appoint subcontractors to perform the R&D for you, contract papers will be necessary to acknowledge your rights to the intellectual property. Other good examples of supporting documentation are invoices and 1099 forms.
  • Structure your general ledger so that you can easily find supply costs associated with the R&D. Ideally, this information should be backed up by relevant invoices.

What Further Steps You Need to Take

Summary

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