One of the government's greatest gifts, from a tax standpoint, is the research and development (R&D) tax credit.
The R&D tax credit is available to companies that are developing new or improved products, processes, formulas, inventions, computer software or techniques. It can be claimed to offset tax liability at the federal level and in more than 30 states. This is big news for companies involved in the oil and gas industry.
The earliest version of the R&D tax credit focused on companies performing work traditionally associated with R&D, such as pharmaceutical companies, aerospace companies and the like. Since then, significant changes have been made to the R&D tax credit. These changes have expanded the applicability of the credit to more industries, and they can directly impact a business' bottom line.
In 2003, major changes to the R&D tax credit were made to enable small- and medium- sized businesses to take advantage of this generous tax reduction. Under the new version of the R&D tax credit, companies were no longer required to create something new to the world, documentation requirements were relaxed, and the definition of R&D shifted away from a narrow focus on the research component to a greater emphasis on the broader development activities.
Because of this change, oil and gas companies, manufacturers, custom fabricators, job shops, engineering companies, architecture firms, software developers, design-build construction firms, mechanical and electrical engineers, and many other industries became eligible to take advantage of the R&D credit.
In addition to the changes made in 2003, the Protecting Americans from Tax Hikes (PATH) Act of 2015 made further changes to the R&D tax credit.
For the 2016 tax year, the following changes were made:
- Companies averaging under $50 million in gross receipts for the previous three years could now use the R&D tax credit to reduce all taxes paid, including alternative minimum tax.
- A payroll credit was created to allow all qualifying startup companies -- not just the ones paying income taxes -- to use the R&D tax credit and immediately reduce their FICA payroll taxes.
- The R&D tax credit became a permanent tax credit, giving companies the ability to create long-term financial plans and maximize their tax reductions.
There's no limitation on the amount of expenses and credit that can be claimed each year. If the federal R&D credit cannot be utilized immediately or completely, then any unused credit can be carried to other years for use when they are needed. It is a dollar-for-dollar tax savings that directly reduces a company's tax liability.
The R&D tax credit regularly provides a wide range of businesses with a source of extra cash -- up to 10 percent of annual R&D costs for federal purposes and much more when state credits are factored in.
Expenses that can be claimed as R&D credits
Some of the expenses that can be claimed as R&D credits include taxable wages for employees who perform, directly supervise or directly support qualified activities in the U.S. Supply costs used in qualified activities can be captured, including prototypes, pilot models, custom tooling/fabrication, etc. These expenses can be significant in aggregate and result in large R&D credits. Finally, contract research expenses for qualified activities performed in the U.S. can be claimed for qualified services as well.
Billions of dollars go unclaimed annually
Companies that do not claim the R&D credit often do so because of confusion regarding qualifying activities, expenditures, documentation and how the credit can be used.
Accounting and CPA firms, although great at most things, are not specialized in this area, and therefore often leave substantial money on the table when doing R&D calculations. Much like a family doctor who knows about heart surgery, it's the specialized cardiologist who is called on to perform the procedure. The two work in tandem.
ABGi works either independently or alongside a company's trusted CPA and accounting firm to administer the best possible financial outcome and maximize all available R&D tax credits.
For more information and a free R&D tax credit consultation and analysis, visit www.abgi-usa.com, or contact Greg Miller at greg.miller@abgi-usa.com or (281) 732-1848.
