In the U.S., R&D tax credits are available to help offset the cost of conducting research activities. Companies that perform research and development in areas like engineering, software development, product design and more may be eligible for R&D tax credits.
The R&D credit can be used by businesses to reduce their taxable income or claim a refundable dollar-for-dollar tax credit. Some activities can be claimed and others are not eligible, and it’s the same for the associated expenses for the research activity.
Do Employee Wages Count for R&D Tax credits?
If the wages were paid during the development of R&D activities, they are eligible for R&D tax credits. The wages must be related to R&D activities, and the employee must have worked on R&D activities during the taxable year; doing such activities would meet the definition of R&D activity as defined by the IRS.
For example, if a software developer is working on code for an R&D project, their wages may qualify for R&D tax credits. Another example is if a design engineer is working on creating R&D prototypes, their wages may also qualify.
Are Other Expenses Eligible for R&D Tax Credits?
Yes. Other expenses such as materials, supplies, and contract research costs associated with R&D activities may also be eligible for R&D tax credits.
This includes expenses for manufacturing, testing and development of R&D prototypes. In addition, some costs associated with R&D projects that don’t directly relate to R&D activities may also be eligible for R&D tax credits on a case-by-case basis. This includes expenses for software licenses and maintenance, computer hardware, design tools, and more.
Can software used in R&D be expensed?
Yes, software used in R&D activities may be expensed. The IRS considers R&D software to be tangible property, which means it generally qualifies for R&D tax credits if certain criteria are met. For example, the software must be necessary and integral to performing R&D activities, have an estimated useful life of more than one year, and be owned by the company claiming R&D tax credits. Additionally, the software must meet certain requirements to qualify as R&D property.
Can computers be expensed?
Yes, computer hardware and equipment used in R&D activities may qualify for R&D tax credits. The R&D tax credits available can vary depending on the type of R&D activity being conducted and the specific item being purchased. Generally, R&D tax credits are available for computers, servers, storage devices, software licenses, and other R&D-related equipment.
Can office supplies be expensed?
No, office supplies are not allowable expenses under the R&D Tax Credit program. Any of the incidental supplies needed to run an office — including pens and pencils, paper clips, printer ink and toner, post-it notes, staples and rubber bands — are not allowable for R&D tax credit.
The R&D tax credits are designed to offset R&D related activities, and while office supplies are necessary they do not directly relate to R&D activities. Therefore, office supplies do not qualify for R&D tax credit deduction. Of course, they can be itemized on the business’s tax return as an expense.
Are materials used in R&D activities eligible for tax credit?
Purchases of certain materials and supplies used for R&D activities may be eligible for R&D tax credits. This could include raw materials, components, or parts that are used in the development of R&D projects. To qualify, these materials must be necessary to perform R&D activities and they must have been purchased and used in the same year.
Examples of allowable expense for R&D tax credit include:
- Wages paid to R&D employees
- Contract research payments
- Machinery and equipment used for R&D activities
- Software related to R&D activities
- Supplies necessary for R&D activities
- Research materials used in R&D projects
Can equipment be expensed?
Yes, qualifying R&D equipment can be expensed for R&D tax credits. Equipment must have been used exclusively for R&D activities in the same year it was purchased, and it must be integral to the R&D process. This includes machinery and equipment used in testing R&D projects, as well as any instruments or tools needed to perform R&D activities.
Companies should understand the rules and regulations associated with R&D tax credits to maximize their benefit from claiming them. With proper planning and guidance, companies may be able to reduce their overall tax liability by taking advantage of R&D tax credits which can help them continue R&D activities and remain competitive.
Call American Financial Tax today to speak with one of our specialists and start your R&D Tax Credit application process!