The US R&D tax credit rules enable businesses of all sizes to reduce their federal income tax for expenses incurred on qualified research activities.
Source Advisors has helped companies claim over $1.6 billion in credits to date, enabling innovative companies in the US to benefit from cost savings which can increase cash flow by reducing tax rates. US companies can claim R&D credits for open tax years going back 3-4 years.
A US taxpayer can claim their R&D tax credit by filing IRS Form 6765, credit for increasing research activities (for the year in which the qualified expenses were paid or incurred). In the USA R&D tax credit can be claimed either on their timely filed tax return including extensions for a given year or it is possible to amend prior returns, typically credit can be claimed for the previous 3 years.
Having the right documentation is essential when defending an R&D tax credit claim. In order to qualify for an R&D activity, the activity must meet the Four Part test which includes:
The types of research and development activity which qualifies for US R&D tax credits is robust, and includes as examples:
Qualifying expenditure can include the following when it relates to a qualified research activity:
A start up business in the US can also qualify to offset payroll taxes if each of the following criteria is met:
Source Advisors, can assess a company’s federal R&D tax credit opportunity and also determine any state R&D tax credit availability. Many states offer their own R&D tax credits, often being more generous than the federal credit. Our US team of experienced CPAs, attorneys, engineers, and technology experts helps innovative companies navigate their options.
Check if your state offers R&D tax credits on this map.
Since 2015, The Protecting Americans from Tax Hikes (PATH) Act has allowed innovative SMEs in the US to offset their Alternative Minimum Tax (AMT) liability with the R&D tax credit for taxable years beginning on, or after, 1 January 2016.
Before that date, qualified companies could be limited by AMT and unable use the full 100% of their R&D tax credit. Instead, any excess credits had to be carried back and then forward. However, the PATH Act makes it possible for small businesses to offset their AMT through the R&D tax credit without limitation.
In the US there are two possible methods to calculate the R&D tax credit: The Regular Credit (RC) method and the Alternative Simplified Credit (ASC) method. There isn’t a one size fits all, with both methods having distinct advantages and disadvantages. Our team at Source Advisors can determine the best calculation method based on your specific situation each year.
There are four sections of IRS Form 6765 that must be evaluated:
Section A – for any US business attempting to claim the R&D credit using the RC method
Section B – for any US businesses electing to use the ASC calculation method
Section C – further documentation based on the specific business setup
Section D – required for any small business that falls under the payroll tax election