R&D Tax Credit Eligibility
What is an R&D Tax Credit, and what companies are eligible?
Mostly tech and manufacturing firms claim this credit, but other firms are often eligible to take it also.
Architecture and Engineering Firms think they don’t qualify for the R & D Tax Credit. But they can often be wrong.
Here is what is misunderstood about the R&D Tax Credit:
They don't qualify for the credit because they are not "Manufacturing"
Section 41 was not designed exclusively for Manufacturers, although they are our most common client for R&D Tax Credits. Qualification is based on activities performed by the company. A list of these activities can be found here.
The IRS definition of R&D is quite different than yours or mine. It often includes activities such as:
New Product & Process Development
Developing New Concepts or Technologies
Design – Layout, Schematics, AutoCAD
Prototyping or Modeling
Testing / Quality Assurance: ISA 900X, UL, Sigma Six, etc.
Integration of new machinery (CNC, SLA, SLE, etc.) into existing processing
Software Development or Improvement
Automating or Streamlining Internal Processes
Developing Tools, Molds, Dies
Developing or Applying for Patents
Just to name a few……
The credit is based on QREs. What is a QRE?
A QRE is a "Qualified Research Expenditure" as defined by the IRS in Section 41(b).
Basically, a QRE is any eligible expenses for the credit, including wages, supplies, and contract research expenditures. For most companies, full-time product development engineers’ wages come to mind first and are easiest to recognize; however, a closer look at definitions and examples may lead to the inclusion of additional wages, supplies, or contract research.
If fact, Architectural, Engineering, and Construction (AEC) often qualify at much higher rates than traditional manufacturers.
The Client is too small to qualify for the R&D Tax Credit
Technical-based firms may qualify even if well below the typical million-dollar payroll threshold. The reason for this can be found in the main that the credit is calculated. The credit is not based on the total annual payroll; it's based on the total annual payroll multiplied by what percentage of that payroll is a qualified activity for the credit based on the IRS definition of Qualified Activities (again outlined within the app).
This means that a $400K payroll for a technically based company could yield a higher tax credit (and therefore fee and commission) than a $2.4M annual payroll of a general manufacturer. If you want to see if your firm can claim this credit, contact us for a free evaluation.