Who Can Claim R&D Tax Credits?

Any U.S. company, regardless of size or industry, that has conducted qualified research and development activities may be eligible to claim the R&D Tax Credit. The credit is available for small businesses, large corporations, non-profits, and start-ups who all meet the criteria established by the IRS.

The research and development activities that qualify for the tax credit must meet six criteria as outlined by the IRS. These include:

  • Permitted purpose – The activity must be intended to create or improve a product, process, technique, formula, invention, software or similar item.
  • Process of experimentation – The activity must involve testing various alternatives and exploring the consequences of each alternative in order to select the right choice.
  • Technological in nature – The activity must rely on the hard sciences, such as engineering and computer science or physical sciences, like chemistry, biology or physics.
  • Elimination of uncertainty – The activity must seek to discover information that is unknown or uncertain at the outset of the project.
  • Process of improvement – The activity must aim to improve the functionality, reliability or performance of an existing product, process, technique, formula, invention, software or similar item.
  • Business component – The activity must be related to a trade or business and conducted in the United States.

When determining who can claim R&D Tax Credits, it’s important to remember that only expenses associated with the research and development that meet these six criteria can be included in the credit. Also, it’s important to note that employees who are paid wages for qualified activities are also eligible for R&D Tax Credit even if the company does not claim the credit itself.

In conclusion, any U.S. company who has conducted qualified research and development activities that meet the six criteria outlined by the IRS may be eligible to claim R&D Tax Credits. It’s important to remember that expenses associated with the research and development must meet these criteria for them to be included in the credit, and employees who are paid wages for qualified activities are also eligible for the credit even if the company does not claim it.

What is an Eligible Small business for the R&D Credit?

A small business with sales less than $50 million (for at least three previous years) can use the R&D credit to offset its Alternative Minimum Tax (AMT) liability or to receive a credit of up to $250,000 per tax year. The credit is not refundable but it can be carried forward for up to 20 years.

For federal purposes, an eligible small business is defined as any company that has gross receipts of less than $50 million in the current year and that had less than $50 million in gross receipts for each of the three prior years.

Can Startups Qualify for the R&D Credit?

Emerging businesses can take advantage of the R&D credit — even if they have no taxable income — using a carryover of prior year credits to offset their current year tax liability. Startups that have not yet hit the $50 million gross receipts threshold, who are developing innovative technology or products, and who are conducting qualifying research activities may be eligible to receive R&D Tax Credit. The first year of the credit is paid out over five years thanks to a change in the law that occurred in 2017.

R&D Tax Credit for Qualified Small Business

R&D tax credit is also available to qualified small businesses that have less than $5 million in sales and no more than five years of operation. Qualified small businesses can use the credit to offset their payroll taxes or receive a credit of up to $250,000 per tax year. The offset applies to the employer part of FICA tax. The credit is not a refund; it is made available to the employer’s account during the first quarter after the tax return was filed/claimed. 

States may offer their own version of the credit which may include additional eligibility criteria such as a maximum limit on total employee wages and/or a base amount that is used to calculate the eligible expenses. Nevertheless, it provides a potential additional benefit to some businesses that may otherwise not qualify for the federal credit.

How do I Request the R&D tax credit?

To claim the R&D Tax Credit, small businesses must complete and file Form 6765 with their federal income tax return. This form requires detailed information about the research and development activities that have taken place during the year as well as any related expenses incurred.

It is important to keep accurate records of all research and development activities, including who was involved, what activities were conducted, when they occurred and how much was spent.

What is IRS Tax Form 6765?

IRS Form 6765 is used to claim the Research and Development Tax Credit. The business filing may elect to reduce their credit under 280C and also to apply the credit to the employer portion of Social Security taxes in the following year.

Can Sole Proprietors Claim the R&D Tax Credit?

Sole proprietors who perform qualified research and development activities may be eligible to claim the R&D Tax Credit. However, there is an additional requirement that must be met before the credit can be claimed: The sole proprietor must have established a separate trade or business devoted exclusively to research and development activities before they are able to claim the credit.

American Financial Tax assists businesses of all sizes in claiming the R&D Tax Credit. Our experts are knowledgeable on the requirements of who can claim R&D Tax Credits, and they assist in the claim process. Reach out to American Financial Tax today if you would like assistance filing your R&D Tax Credit.

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