Are you a small business owner looking to take advantage of the Research & Development (or R&D) tax credit? If so, you’ve probably heard the term “business components” and are knee-deep in researching this “four-part qualifications test” you’ve been reading about. We’re delving into all that and more in this blog post. So sit back, get your scrolling thumb ready, and lean in to learn all your pressing questions about the R&C tax credit in this easy-to-skim six-minute article.
As highlighted in this recent blog , the Research & Development (or R&D) tax is a United States government-sponsored tax initiative. It results in a dollar-for-dollar reduction in a company’s tax liabilities and is one of the best things American businesses can do to reduce their liability tax. The research and experimentation tax credit was essentially designed as an incentive to make research activities more affordable for businesses, strengthening American innovation.
A business component is any of the following that is for sale, lease, license, or used in trade:
Product
A product is what you make or sell for profit. So, for example, if you own a small manufacturing business that produces pre-packaged snack foods, any new foods you test and make would count as a business component. Of note: Products don’t necessarily need to be tangible. For example, if you’re an architect, your completed building design is your “product” (or business component), even if you haven’t built it.
Invention
The foundation of innovation is invention. Inventions come from research which could include carefully focused sustained inquiry and much trial and error. For example, in 2019, one company created the world’s first talking hearing aid. Suppose your small business or manufacturing company is on the verge of creating a new invention or already has a pile of recently completed creations on your shelves. In that case, you could qualify for Research & Development Tax Credits with your invention counting as a business component. As Albert Einstein put it , “Necessity is the mother of all invention.”
Process
The process is how you make your product, including the attached expenses. For instance, if you invested in new equipment for your small business, they would be counted as your qualified process improvements or business component. Although the equipment cost is most often capitalized (and not counted toward the R&D tax credit), the cost of the employees figuring it out, any materials needed for optimizing, and any third-party consultants you worked with would count as qualified research expenses or QREs.
Technique
Technique refers to the “tools” that your small business uses to follow through with your processes, from concept to completion. In manufacturing, we’re talking about the folks actively developing the molds, tools, models, and dies. The technique can also to processes with end-goals to go green, drive quality initiatives, and reduce waste.
Software
With technology advancing so rapidly, the software has to adjust accordingly. Is your small business writing custom code? If your coding project hits the mark for one of these four scenarios, you could qualify for the Research & Development Tax Credit.
Formula
Often, business owners tend to group all research into one general category; they don’t tend to identify specific business components separately. But for a taxpayer to claim the Research & Development tax credit, they’ll need to be able to tie individual research to a specific business component. So it’s essential to keep accurate records for claiming an R&D credit.
But what precisely should you keep track of? Read on in our next section to learn how to claim the Research & Development tax credit and what specifics you’ll want to pay close attention to.
To make things easier for small business owners, the Internal Revenue Service, or IRS, has outlined a four-part test to determine eligibility. If you can pass each component of this test and aren’t already in the middle of filing for R&D tax credits, you could be missing out on an easy way to reduce your tax liabilities.
So you have a business component that matches, you’ve checked the Four-Part Qualifications and started gathering your qualifying documents. What’s next? Now is the perfect time to reach out to a team of tax specialists. We guarantee that your experience will be professional, timely, and compliance-driven, saving you time, money, and resources.
Still not sure? Let’s run through a quick example of how a few companies could pass the Four-Part R&D Qualification Test and qualify for the credit:
Let’s say you’re in charge of a manufacturing firm developing medical devices. You want to increase productivity from 12 percent to 17 percent and are looking for ways to make this goal happen.
The following activities could qualify you for the R&D credit:
Similarly, suppose you have a product run by software. In that case, the costs of developing new software to make that product more efficient or reliable may qualify you for the Research & Development tax credit. Or, if you’re an engineering firm, the costs attached to researching and establishing green technology could qualify.
Many projects could qualify you; Save up to $250,000 for your small business from research and development. Maximize your savings and let Stenson Tamaddon ensure that your R&D Tax Credit filing is accurate, compliance-focused, and on time – allowing you to get back to what you love doing.
Is your business already performing one or more of the business components above? If so, you may be ready to start claiming the Research & Development tax credit.
First up on your to-do list? Check above for the four-part qualification test. Here is where you’ll find the specific questions you’ll need to address to decide if you’re eligible to claim the credit.
If you pass the four-part qualification test, you’re ready to gather your documents. These could include:
Specifically, you’ll want to retain all records that correlate with each specific R&D project, ensuring that all calculations of the credit eligibility are in order.
Next up? Check below for the best way to file for the Research & Development tax credit.
Stenson Tamaddon works with business owners to leverage the benefits of government stimulus programs like the R&D Tax Credit.
We believe in a professional, compliant approach to tax credit services and provide a hassle-free promise to customers that their R&D Tax Credit filing will always be accurate, compliance-driven, and secure. Our team uses proprietary technology to deliver services that are second to none while fully maximizing your filings. With offices from New York to Arizona, we exist to provide optimal results for your R&D Tax Credit filing with minimal disruption to your business.
Don’t wait to file for the Research and Development Tax Credit. In as few as these three steps, we’ll help you retrieve the money you deserve:
Get the money you deserve. We’re ready to help you identify what federal stimulus funding may be available for your business. So get started with an R&D tax credit specialist today.
The post R&D Credit 101: Defining Business Component first appeared on Stentam.
The post R&D Credit 101: Defining Business Component appeared first on Stentam.
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