Federal Tax Credit
How can your business maximize Federal and State R&D Tax Credits?
The Federal R&D Tax Credit
EPSA USA supports businesses across industries in maximizing their benefits from the Federal Research and Development (R&D) Tax Credit, officially known as the Credit for Increasing Research Activities. This credit, established in 1981 and made permanent by the Protecting Americans from Tax Hikes (PATH) Act in 2015, was designed to foster innovation within the United States. It’s accessible to a wide range of industries, far beyond just those involved in patent development or laboratory research.
To qualify for the R&D Tax Credit, companies need to analyze both their current year expenses and, if available, the expenses from the three preceding years. The credit can be claimed for the current year and retroactively for any open tax years. Additionally, unused credits may be carried back one year or carried forward for up to 20 years.
State R&D Tax Credits
Many states have introduced their own R&D Tax Credits following the federal initiative. These credits can be claimed alongside or independently of the Federal R&D Tax Credit, with each state having its own qualification criteria and calculation methods.
How can you qualify and what are the eligible expenses ?
Qualification Requirements for the R&D Tax Credit
The definition of research and development is fairly broad and encourages companies from a variety of industries to claim the credit. To claim the R&D Credit, a company’s activities must meet the four-part test requirements set forth in Internal Revenue Code (IRC) Section 41, as detailed below.
- New or improved business component includes a product, process, formula, software, invention, or technique. A design is considered a product for R&D credit purposes.
- There must be an uncertainty to eliminate, including an appropriate design, methodology, or capability. This translates to evaluating whether a company was uncertain as to any of the following: can we do it?, how are we going to do it?,” or “what is the appropriate design for what we’re we are trying to do?”
- The uncertainty must be eliminated through a process of experimentation. This process of experimentation cannot be merely plug and play – there must be a systematic trial and error process used to overcome the uncertainty.
- The process of experimentation must be technological in nature, including the principals of physical or biological sciences, engineering, or computer science. Social sciences, including arts or humanities, are specifically excluded.
Eligible Expenses of the R&D Tax Credit
The R&D Credit allows four types of expenses to be included in the credit calculation.
Wages paid or incurred to an employee for qualified services. Qualified services include activities of individuals directly engaged in R&D, as well as activities of individuals directly supporting or directly supervising R&D.
Supplies used in the conduct of qualified research for tangible property other than land or improvements to land and property subject to the allowance of depreciation.
Rental or Lease of Computers/Cloud hosting expenses tied to qualified research activities.
Contract research expenses paid or incurred by a taxpayer to any person (other than an employee) for qualified research.
Do you have any questions? We have the answers.
How can you use the R&D tax credit?
Generally, most companies use the R&D Credit to offset income tax of the company and/or the shareholders or partners. However, with the passing of the PATH Act, start-up companies can now use the R&D Credit to offset the employer portion of the taxpayer’s Social Security tax liability. In 2022, EPSA USA helped companies get 400 millions of dollars of R&D Tax Credit, with 99.7% of valid Tax Credi after controls.
*Each situation must be evaluated on a case by case basis to determine the most appropriate utilization strategy
Offsetting income tax
- R&D credits can be used to offset current income tax
- R&D credits can also be generated for several years and carried forward to offset income tax related to the sale of a business*
- C-Corporation R&D Credits can be considered an asset on a company’s balance sheet*
Offsetting Social Security Tax Liability
- The R&D Credit can be used to offset the employer portion of Social Security tax liability
- To be eligible: Company has to be 5 years old or less ; Company has to have less than $5 million in gross receipts/sales
- Nuances : Maximum of $250k per year
- Can be used for expenses for all employees, not just employees engaged in R&D
- Any unused credit can be carried forward to offset future payroll tax or income tax, depending on the financial situation of the company
- We will work with CPA and payroll provider to ensure the correct information is filed on the necessary forms
Net Operating Losses
- Depending on the tax paying position of the company, it may be possible to go back more than 3 years to generate an R&D credit to be carried forward
- This is very specific to each entity and would need to be evaluated on a company by company basis
Our process
Our technical and legal experts are well-versed in the relevant Internal Revenue Code sections, as well as the regulations and case law that govern the R&D Tax credit. Our team ensures that our analysis is in line with the ever changing guidance surrounding the R&D Tax credit
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Education & Advisement
Explain qualifying criteria
Technical Lead Q&A (if needed)
Utilization of Tax Credit
> Kick Off -
Feasibility assessement
Gathering of documents
Evaluation of QREs
Viable credit determination
Feasibility assessement call
> Decision to move forward? -
Qualification
Project list identification
Qualification interviews
Gather project documentation
Contract review -
Calculation
Calculation of Qualified Research Expenses
Determination of Final Federal and State R&D Tax Credits
Forms 6765 Provided
Final Credits Call
> Final Credits Filed -
Substantiation
In-Depth Technical Report
Contact us today
Ready to elevate your firm’s capabilities and client services? Contact EPSA today to explore how our partnership can be a catalyst for your success. Let us navigate these incentives together, ensuring your firm remains at the forefront of innovation and expertise.
Samuel Koch
skoch@epsa.com
Ashley Chikes
achikes@epsa.com
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Explore the EPSA USA R&D one-pager to gain detailed insights into our innovative research and development initiatives within the United States.
Discover our solutions to benefit tax credits and incentives
With our team of local experts, EPSA USA is focused on helping companies of all sizes take advantage of the Research and Development Tax Credit at both the federal and state level.
Our technical and legal experts follow IRS guidelines to identify qualified research expenses that dictate eligibility.
We work hand-in-hand with CPAs, clients, and partners to offer tailored solutions to identify R&D Tax Credits. Our streamlined process is efficient, fast, and guaranteed to optimize tax benefits for a variety of industries.