When it comes to the federal research and development (R&D) tax credit, did you know there are two ways to utilize the incentive? Depending on a few factors, businesses may claim their federal R&D tax credits against either their payroll tax liability or their income tax liability. While only one can be claimed at any given time, smaller or newer companies frequently utilize the payroll tax options but may eventually outgrow it and instead prefer the income tax option. With the passage of the PATH Act in 2015, TriNet Clarus R+D was founded to help early-stage companies more efficiently claim R&D credits against their payroll tax liability. Follow along as we review the history of the incentive and explore the differences between each option.

What is the Federal R&D Tax Credit?

The incentive was originally introduced as an income tax credit in 1981 to encourage innovation and economic growth in the US. Since innovation is expensive, the government created this tax credit to offset some of that cost. This was great for companies with an income tax liability; however, due to the way the tax credit was originally structured, it excluded many companies that innovate, namely startups. Because startups tend to spend more money than they bring in, and therefore lack profit to utilize an income tax credit, the federal R&D tax credit in its original form offset a tax they weren’t even paying. The passage of the PATH Act in 2015 made the federal R&D tax credit permanent and introduced a payroll tax offset so startups could finally use the incentive against taxes they actually pay – their employer portion of FICA taxes.

Claiming Federal R&D Tax Credit Using Payroll Tax Option

To utilize the federal R&D tax credit against your payroll tax liability, generally, the taxpayer must be a qualifying small business meeting the “5-5-5 Rule.” This means a company must:

• Have less than $5 million in gross receipts for the current tax year.
• Be within their first five years of receiving any gross receipts.
• Can only claim the payroll tax liability offset up to five times on an original, on-time business return.

For purposes of the first five years requirement of gross receipts to qualify for the payroll tax credit, the IRS definition of gross receipts is actually broader than just the sales that are listed on the tax return. It also includes any interest, rent, or royalties you’ve received. So, some businesses start their five-year clock earlier than they realize.

The maximum federal R&D payroll tax credit had been $250k since 2015; however, the Inflation Reduction Act increased the maximum limit to $500k, starting with tax years that began after December 31, 2022. The law also allowed businesses to use the tax credit against both the Medicare and Social Security portions of their payroll tax liability. Once the payroll tax credit is claimed, there is no expiration or specified carry forward period.

Claiming the Federal R&D Tax Credit Using Income Tax Option

To utilize the federal R&D tax credit against your income tax liability, there are no restrictions to gross receipts or number of years. You can claim federal R&D tax credits on amended returns. There is no limit to how large your claim can be, and you can claim it every year that you are eligible. When claiming the tax credit against your income tax liability, you are simply reducing your business’s income tax liability. When you go to pay your income taxes for that year, they are reduced by the amount of the tax credit. If your tax credit amount is larger than your income tax liability, you can carry it forward for up to 20 years.

If this all seems difficult to navigate, that’s where TriNet Clarus R+D can offer an end-to-end solution. Pairing world-class R&D tax credit software with a team of tax experts and CPAs will help support compliance while simplifying the process. To learn more, schedule a free consultation today.

© 2024 TriNet Group, Inc. All rights reserved. TriNet Clarus R+D does not provide legal, tax or accounting advice. The information herein and the opinions expressed may not apply to your company or scenario, so you should consult with your own advisors on how best to proceed.

This post may contain hyperlinks to websites operated by parties other than TriNet Clarus R+D. Such hyperlinks are provided for reference only. TriNet Clarus R+D does not control such web sites and is not responsible for their content. Inclusion of such hyperlinks in this article does not necessarily imply any endorsement of the material on such websites or association with their operators.

As an innovative business leader, you may already be aware of federal research and development (R&D) tax credits, but you might not realize most U.S. states also offer their own R&D tax credits. It’s important to understand the difference between state and federal R&D tax credits, who qualifies for each type, and which states have unique rules and regulations. This article will dive into the extra incentives provided by state R&D tax credits, as well as any additional considerations your business may need to keep in mind.

With two-thirds of U.S. states offering some sort of state R&D tax credit, there’s a good chance your business may be able to take advantage of them if you are also eligible for the federal R&D tax credit. Just like at the federal level, these tax credits are for businesses who spend money on eligible R&D expenses in a state. In general, states follow the same qualification guidelines as the federal R&D tax credit, but details like the calculation method, definition of certain terms and regulations, and carryover periods can vary. Although it may seem tough to navigate due to the many variables, the experts at TriNet Clarus R+D can assist you in evaluating eligibility within those states along with your federal R&D study.

In most states, income tax is imposed on the net taxable income of a business allocated to the state. The state’s taxable income is determined using Federal taxable income as a starting point, then the portion of the business that is attributable to activity in the state or apportionment is calculated.

But how do you know if your business’s activities are “connected” to a specific state, or to multiple states? When it comes to determining whether you may be eligible for an R&D tax credit to help offset your tax liability in certain states, there are several things to look at:

• Nexus: the amount of connection a business has to a state. States can use different standards for determining that connection.
• Physical presence standard: an out of state business must have offices, employees, agents, or property in state to establish income tax
• Economic presence standard: an out of state business must earn income from economic activity in the state to establish income tax
• Apportionment factor: determined based on the portion of sales, payroll, and property in the state. Also determines the amount of net income that can be subject to net income tax by the state.

As mentioned, state R&D tax credits generally follow the same or similar qualification criteria outlined for the federal R&D tax credit. Section 41 of the U.S. tax code says that qualifying work for the R&D tax credit must meet the requirements in the four-part test:

• Permitted Purpose: the purpose of a qualifying project must be related to creating a new or improving an existing business component.
• Technological in Nature: work needs to rely on principles of physical, biological, or computer science or engineering.
• Elimination of Uncertainty: when work began on a qualifying project, there would have been uncertainty related to your capability to create the product or improvement, the methodology you would use, or the correct product design.
• Process of Experimentation: the project must involve a process by which you tested alternatives and resolved the uncertainty above.

In the instructions for most state R&D tax credits will typically include a reference to requirements in Section 41 of the Internal Revenue Code, but you may also see some exceptions or terms that are defined differently for purposes of the state tax credit.

Let’s take a closer look at a few states that have unique rules and typically have many companies claiming the state R&D tax credit:

California

When using the regular method of calculation, California’s R&D tax credit closely aligns with the federal R&D tax credit applying a fixed base percentage determined from historical gross receipts and R&D spend. The tax credit amount is determined considering gross receipts and qualified research expenses (QREs) related to R&D work done in California. However, California defines gross receipts as the sale of real, tangible, or intangible property held for sale to customers and delivered to a purchaser within California. This limited definition means receipts related to license payments are generally excluded from the R&D tax credit calculation.

The state R&D tax credit in California is generally equal to 15% of qualified expenses that exceed a base amount. Businesses claim this state R&D tax credit on Form FTB 3523 with their business return. The tax credit is non-refundable and permitted to be used to reduce tax liability. If the state R&D tax credit exceeds tax liability or can otherwise not fully be utilized, unused tax credits can be carried forward indefinitely.

Taxpayers can also elect to use the alternative incremental tax credit method for their California state R&D tax credits. Using this method, you calculate your R&D expenses from the past 3 years, find the average, and use 50% of that average as your base amount. You then subtract the base amount from your current year’s R&D expenses and add a 15% tax credit value to the difference.

Taxpayers are not permitted to select this method if they have no California gross receipts. Additionally, taxpayers who elect to use this method must continue to use it for each year moving forward, unless they receive permission from the California Tax Board to switch. Use of the California Alternative Incremental Credit is a permanent election.

Georgia

Unlike California, Georgia offers only one calculation method. Using this method, the base amount is determined by multiplying a ratio of the past three years of Georgia research expenses and taxable income by taxable net income. The tax credit is generally equal to 10% of QREs that exceed the base amount. Taxpayers can claim the tax credit on GA Form IT-RD with their business return. The tax credit is nonrefundable and is used to reduce up to 50% of a business’s income tax liability. Excess tax credits can be used to offset Georgia state payroll withholding tax, which is a great option for businesses with little to no income tax liability that not all other states offer. Claiming the withholding benefit must be done by filing GA Form IT-WH within 30 days after filing a timely Georgia income tax return. Similar to California, unused tax credits can be carried forward, but only for up to 10 years.

Pennsylvania

In Pennsylvania, businesses can submit their applications for the tax credit via the state portal between August 1st and December 1st in the year following the relevant tax credit year. The state R&D tax credit is allowed to be sold for cash if the tax credit exceeds the tax liability for the year, and unused tax credits can be carried forward for up to 15 years.

The calculation method for the Pennsylvania state R&D tax credit uses a base amount of either prior years’ average state R&D expenditures or 50% of the current year’s state R&D expenditures, whichever is greater. Additionally, a business must have at least two years of R&D expenditures. In Pennsylvania, the state R&D tax credit is tentatively calculated as 10% of qualified expenses that exceed the base amount.

The state determines a set total amount of funding for all tax credits claimed for a particular year. Approved tax credits are pooled and the full amount of funding for a year is allocated to all approved applications submitted before the deadline. Final tax credits are communicated via award letters that are mailed to taxpayers beginning on May 1st of the year following application. All applications for the Pennsylvania state R&D tax credit require detailed information about the business, such as R&D spend by location, relevant project descriptions and evidence of meeting the four-part test, breakdowns of contractor spend, and business ownership information. It’s also important to note that the state frequently requests additional information and will not approve tax credits without receiving.

At TriNet Clarus R+D, our team of experts can help evaluate whether the states where you pay taxes offer R&D tax credits that may be eligible to offset your tax liabilities. We can also provide guidance on effective ways to claim these tax credits, helping you maximize your incentives. Get started today by scheduling a free consultation.

© 2024 TriNet Group, Inc. All rights reserved. TriNet Clarus R+D does not provide legal, tax or accounting advice. The information herein and the opinions expressed may not apply to your company or scenario, so you should consult with your own advisors on how best to proceed. This post may contain hyperlinks to websites operated by parties other than TriNet Clarus R+D. Such hyperlinks are provided for reference only. TriNet Clarus R+D does not control such web sites and is not responsible for their content. Inclusion of such hyperlinks on our website does not necessarily imply any endorsement of the material on such websites or association with their operators.

Early spring is a busy time of year for many businesses who are looking to meet their income tax filing deadlines. If you’re only just learning about the federal research and development (R&D) tax credit, don’t worry, you may still be able to file a claim for the tax credit by filing an extension or by amending your income tax return.

To apply your federal R&D tax credit against your payroll tax liability, you ideally should claim it on your original income tax return — which is why the option to extend is so important for startups. However, companies that are unable to apply the tax credit against their payroll tax liability may be able to apply their R&D tax credit against their income tax liability by amending their income tax return – and can even consider performing a ‘lookback’ to capture up to three years of unclaimed tax credits. Whichever option you may be eligible for, you don’t have to miss out just because your tax filing deadline may have already passed.

Keep reading for some tips on how to approach claiming the R&D tax credit if the tax deadline is approaching or have already passed.

When to file an income tax extension

Your income tax extension needs to be filed by your original income tax filing date. Depending on your type of business entity, your tax filing due date is either mid-March or mid-April.

If you have already filed your taxes but the deadline has not yet passed, instead of filing an extension, you can consider filing what’s called a superseding return. This essentially “undoes” the filing of your original income tax return, allowing you to re-file and include the necessary documentation for the federal R&D tax credit.

If the deadline has already passed, filing an amended income tax return is your only option and you may have to submit additional information.

Filing an income tax extension

Filing an extension is actually very common! Talk with your CPA or tax preparer to ensure it’s the best decision for your business. Once you decide to file an extension, the process is straightforward.

For most businesses, your tax preparer will file IRS Form 7004 to extend your income tax return deadline. For flow-through businesses extending their income tax returns, shareholders or partners may also need to extend their individual tax returns.

Is the federal R&D tax credit worth it?

Yes! If you’re considering claiming the federal R&D tax credit, working with TriNet Clarus R+D can help streamline the process and help you maximize your efforts. We’re dedicated to helping your business and providing a peace of mind. Don’t miss out on the opportunity to recoup valuable resources for your innovative work—reach out to TriNet Clarus R+D today to get support in claiming the federal R&D tax credit with confidence.

© 2024 TriNet Group, Inc. All rights reserved. TriNet Clarus R+D does not provide legal, tax or accounting advice. The information herein and the opinions expressed may not apply to your company or scenario, so you should consult with your own advisors on how best to proceed.

This post may contain hyperlinks to websites operated by parties other than TriNet Clarus R+D. Such hyperlinks are provided for reference only. TriNet Clarus R+D does not control such web sites and is not responsible for their content. Inclusion of such hyperlinks on our website does not necessarily imply any endorsement of the material on such websites or association with their operators.

© 2024 TriNet Group, Inc. All rights reserved. TriNet Clarus R+D does not provide legal, tax or accounting advice. The information herein and the opinions expressed may not apply to your company or scenario, so you should consult with your own advisors on how best to proceed. 

This post may contain hyperlinks to websites operated by parties other than TriNet Clarus R+D. Such hyperlinks are provided for reference only. TriNet Clarus R+D does not control such web sites and is not responsible for their content. Inclusion of such hyperlinks on our website does not necessarily imply any endorsement of the material on such websites or association with their operators. 

Companies across many industries often qualify for the federal research and development (R&D) tax credit. However, claiming the R&D tax credit requires backing up your eligibility with the right documentation. Companies sometimes misunderstand what constitutes required documentation for the R&D tax credit. A simple general ledger line item that says “research expenses” will not do. Here we take a closer look at some “Do’s and Don’ts” when it comes to R&D record-keeping. 

Documentation Do’s 

Many companies claiming the R&D tax credit treat formal documentation as an afterthought. Documenting activities retroactively is risky when claiming the R&D tax credit. Don’t wait to gather what you need to demonstrate eligibility and compliance. A contemporaneous, comprehensive documentation process is the best way to maintain IRS compliance. 

Documentation should be arranged and organized in advance, including any applicable contracts, and taxpayer and employee testimony. The focus should be on the quality of information rather than on the volume. 

Instead of centering solely on technology or research, documentation should be described and presented by applying research tax credit rules. You should organize information by project and on an employee-by-employee basis. Time spent performing qualified and nonqualified activities should also be well-documented. 

Your documentation must prove that your company: 

• qualifies for the R&D tax credit, 
• has conducted the activities for which you are claiming the R&D tax credit, 
• meets nexus requirements. 

A list of qualified research activities isn’t helpful if the costs cannot be traced to specific projects or activities. Nexus is established if your accounting records connect to your qualified research expenses at the business component level. Also, under what’s called the “Consistency Rule,” you must define your expenses in the same manner from year to year. 

Detailed and clearly written reports are your best defense during an audit. If the IRS can’t easily understand the information you’ve submitted about your activities and expenses, the lack of clarity and documentation can impact your final R&D tax benefit. Submitting concise, relevant, and accurate information can play a crucial role in mitigating corporate risk while maximizing access to the benefits your company can claim. 

If the IRS disallows your claimed credit, taxes in the year the credit was claimed as well as additional tax years are impacted. This may result in the need to refile prior returns and additional taxes owed. If your R&D tax claim is unsupported, you may be subject to penalties. You should carefully review any reports or studies prepared by your tax preparer to ensure the documentation accurately reflect your activities. Tax preparers who are involved in the preparation of improper claims or R&D tax credit studies also may be subject to penalties. 

Documentation Don’ts 

The rules outlining the documentation requirement are outlined in Treasury Regulation Section 1.41-4. The IRS Audit Techniques Guide for the Research Credit and the IRS Chief Counsel Memorandum released in October of 2021 provide insight as to how they interpret and administer those rules. Highlights include: 

• Documentation should be specific to the taxpayer. 

• Submission of documentation should not be prepackaged with a significant amount of generic text that any taxpayer may use. 
• Wherever possible, activities should be documented contemporaneously. 
• Documentation should include project descriptions that address each section of the four-part test. 

Key Takeaways 

The best way to help reduce business risk when claiming the R&D tax credit is to work with an experienced R&D tax professionals to support your documentation process. R&D tax processionals provide support through your projects to help provide guidance on qualifying expenses. In the event you are audited and asked to produce documentation, they may help submit the necessary reports to the IRS, answer questions, and keep your business interests in mind. 

For companies already claiming the R&D tax credit and those that are just beginning to determine their eligibility, it is critical to be thorough when documenting qualified research activities. To help reduce your tax burden when claiming the R&D tax credit, you have a responsibility to make sure it’s defensible by adhering to IRS guidelines and properly tracking expenses. That’s where TriNet Clarus R+D can support. Our tax experts can help you with the R&D tax credits claim process so you can stress less. Reach out today to get started. 

© 2024 TriNet Group, Inc. All rights reserved. TriNet Clarus R+D does not provide legal, tax or accounting advice. The information herein and the opinions expressed may not apply to your company or scenario, so you should consult with your own advisors on how best to proceed. 

This post may contain hyperlinks to websites operated by parties other than TriNet Clarus R+D. Such hyperlinks are provided for reference only. TriNet Clarus R+D does not control such web sites and is not responsible for their content. Inclusion of such hyperlinks on our website does not necessarily imply any endorsement of the material on such websites or association with their operators. 

What if your small business could save thousands of dollars annually in taxes—all thanks to work you’re already doing? The federal research and development (R&D) tax credit makes this possible for companies of all shapes and sizes. Each year the U.S. government provides billions of dollars to innovative businesses for developing and improving technologies, products, and processes.

The R&D tax credit was originally introduced in the Economic Recovery Tax Act of 1981 as a temporary incentive to encourage additional research spending. The passage of the Protecting Americans from Tax Hikes (PATH) Act in 2015 permanently extended the R&D tax credit while expanding its benefits to startups and small businesses. Despite this, many growing businesses continue to miss out. Some perceive it to be too complex or costly, while others mistakenly believe they don’t qualify. To set the record straight and learn more about common R&D tax credit myths, check out our recent blog on the topic.

Businesses in industries that usually come to mind when thinking about eligibility for the R&D tax credit include those in pharmaceuticals, automotive manufacturing, and software development, just to name a few. In reality, businesses in many other sectors are often able to claim this tax credit as well. Categories such as cosmetics, apparel, telecommunications, or even food and beverage may have qualifying work. Below we highlight some of those industries and examples of R&D activities that may qualify for the tax credit.

Architecture

• Developing new or improved designs
• Evaluating alternative designs to meet or overcome complex client requirements, site conditions, or building codes
• Evaluating alternative designs and materials for structural or energy optimization, and/or to achieve LEED certification
• Determining or testing optimal designs for lighting, acoustical, or visual qualities within a structure
• Using building information modeling and computational analysis tools to assess designs for various functional requirements
• Developing schematic designs, site plans, and elevation drawings
• Designing areas for building systems
• Developing environmentally friendly buildings

Construction

• Design and development of electrical, plumbing, HVAC, and energy-efficient systems
• Design and development of buildings, structures, and related components
• Design and development of temporary systems such as shoring, falsework, and dewatering systems
• Development of new or improved processes, methods, and techniques used in the construction process
• Pre-construction planning, including structure, facility, or plant production design
• Development or improvement of equipment
• BIM modeling for design or sub-system coordination
• Improvements to a building’s ability to withstand seismic events or extreme weather

Food & Beverage

• Designing and developing new or improved processes to maintain quality and safety, meet regulations, reduce costs, or improve consistency
• Testing of product ingredient mixtures for desired flavor or aroma
• Designing and developing new products to make traditional products healthier
• Developing or redesigning packaging to improve shelf life, sustainability, or durability
• Developing new processes and techniques for the production of new food products, including mixing times, batching sequences, and cooking temperatures and durations
• Development of new or improved preservative chemicals
• Improving existing production processes to improve efficiency and reduce waste, or to convert waste into energy

Dentistry

• 3D printing
• Development of Platelet Rich Plasma/Platelet Rich Fibrin (PRP/PRF) treatment
• Utilizing an on-site milling machine or in-house lab
• Utilizing and making improvements to technologies
• Creating new or improved processes, techniques, or methods
• Creating and testing prototypes
• Experimenting with alternative materials or attachment systems
• Intra-oral scanning technology
• Use of technology to accelerate time of treatment and fit of custom orthotics/prosthetics
• Nylon appliance development

Agriculture

• Experimenting with or developing new fertilizers
• Hybridizing or developing new strains of crops, plants, or livestock, including developing new gene transfer techniques
• Developing new feeds or feeding techniques for livestock
• Implementing new ways to protect crops or livestock from disease
• Improving harvesting practices, such as automating processes
• Implementing precision farming techniques in attempt to increase yield and/or production efficiency
• Developing and implementing new irrigation systems
• Implementing new equipment to improve harvest cycle times
• Working to optimize the treatment and management of farm wastes in an energy efficient manner

Believe it or not, this only scratches the surface of the types of industries that may take advantage of the federal R&D tax credit. If you’re ready to explore the possibilities, TriNet Clarus R+D has put together a comprehensive, non-exhaustive list of industries to get you started. Still unsure about the R&D tax credit process or how your business might qualify? Our experts are here to help, so schedule a demo today!

© 2024 TriNet Group, Inc. All rights reserved. TriNet Clarus R+D does not provide legal, tax or accounting advice. The information herein and the opinions expressed may not apply to your company or scenario, so you should consult with your own advisors on how best to proceed.

As one of the country’s largest tax incentives, the federal research and development (R&D) tax credit was created and designed to encourage innovation and allow companies to receive money back for work that they’re already doing. Although many small and medium-size businesses (SMBs) are eligible for the federal R&D tax credit, they fail to claim due to a lack of awareness or common misconceptions. Here, we discuss the top three myths that might be holding you back from claiming the federal R&D tax credit, which can help you reinvest in your business:

Myth #1: My business doesn’t qualify 

Startups and SMBs that aren’t in scientific or technical industries may assume they don’t qualify for the federal R&D tax credit. Many businesses also perform activities that qualify without realizing it. The federal R&D tax credit can be claimed by companies of any size in a wide range of industries, including cosmetics, food and beverage, apparel, telecommunications, software development, and more. Chances are, if your company is doing anything technology-based, improving it, and selling it to customers, you may likely qualify.

Myth #2: The savings aren’t worth it 

In 2020, according to Tax Foundation, $11.8 billion was claimed in federal R&D tax credits. Remember, this is a tax credit, not a deduction. You can apply it against certain taxes owed. Plus, the TriNet Clarus R+D technology-driven solution helps to simplify the process of claiming the tax credit and helps to reduce overall fees.

The federal R&D tax credit was signed into law originally in 1981 and expanded in 2015 with the Protecting Americans from Tax Hikes Act (PATH Act), enabling early-stage companies to use the tax credit against certain payroll tax liabilities. The PATH Act allowed newer, smaller companies to take advantage of the tax credit that was previously inaccessible. Regardless of which industry your business fits within, it’s worth looking into and should be an ongoing part of your annual tax strategy.

Myth #3: It’s too complicated to claim 

Many companies feel overwhelmed and don’t know where to start. Working with a trusted, experienced provider is key. The TriNet Clarus R+D team of CPAs and tax experts have decades of federal R&D tax credit experience. The TriNet Clarus R+D Platform is a streamlined software solution that helps to simplify the process to save you time while maximizing your potential tax credit.

Taking advantage of the federal R&D tax credit doesn’t have to be confusing or complicated. Optimize your company’s innovation and growth, and team up with our tax experts today.

© 2024 TriNet Group, Inc. All rights reserved. TriNet Clarus R+D does not provide legal, tax or accounting advice. The information herein and the opinions expressed may not apply to your company or scenario, so you should consult with your own advisors on how best to proceed.

The Tax Cuts and Jobs Act (TCJA) brought about significant changes to the U.S. tax code, affecting businesses across various industries. Among the key provisions that impact research and development (R&D) activities is Section 174, which deals with the amortization of certain expenses related to intangible assets. Understanding Section 174 is crucial for businesses aiming to optimize their tax positions, especially when it comes to claiming the federal R&D tax credit.

Defining Section 174

Section 174 in the federal tax code tells us which portion of R&D costs incurred during a tax year can be deducted in the tax return for that year. These expenditures are incurred in connection with the taxpayer’s trade or business, which represents R&D costs in the experimental or laboratory sense. This includes costs related to the development or improvement of a product or process.

Broader than the costs under the original Section 41, Section 174 spend includes research after commercial production, costs of obtaining a patent, reverse engineering, research conducted outside of the U.S., and other costs that were not previously considered qualified R&D expenses. Spend that is eligible for the federal R&D tax credit is a subset of Section 174 costs.

How does this impact your business?

There has been a lot of confusion surrounding the changes brought about by the TCJA and whether or not they impact the federal R&D tax credit. Starting in 2022, taxpayers are required to amortize R&D spend over five years. Businesses can deduct only 10% of their spend in the first year for income tax, and the remaining 90% is deducted in subsequent years. Lower deductions generally result in a higher taxable income. While many may think these changes make the federal R&D tax credit not worth the time and effort, in reality, the potential increase in taxable income actually makes tax credits, like the federal R&D tax credit, more valuable!

It is important to note that the calculation of the federal R&D tax credit and how it is applied to a business’s tax obligation has not changed. Furthermore, businesses are required to amortize R&D costs regardless of whether or not they even claim the federal R&D tax credit.

To summarize, while the TCJA brought about some changes to the U.S. tax code, it does not lower the value of the federal R&D tax credit or impact how the tax credit is calculated or applied. The federal R&D tax credit remains an incredibly valuable opportunity for businesses of all sizes to be rewarded for their innovative efforts. TriNet Clarus R+D offers a dedicated team of tax experts and a platform solution that helps businesses to efficiently claim R&D tax credits. TriNet Clarus R+D has unique insight into federal R&D tax credits for businesses. To learn more or schedule a demo, connect with our tax experts today.

© 2023 TriNet Group, Inc. All rights reserved. TriNet Clarus R+D does not provide legal, tax or accounting advice. The information herein and the opinions expressed may not apply to your company or scenario, so you should consult with your own advisors on how best to proceed.

Many businesses have moved from having servers located in their office, to putting the server offsite in a data center, to utilizing a server within a cloud service provider, similar to Amazon Web Services or Microsoft Azure. Going serverless altogether is the next natural step in that evolution. In serverless computing, the custom software that you decide to run is packaged into a software container which hosts both the executable code and the operating system. That virtual container is run on one or more servers that you do not need to manage, which is truly the ideal state of cloud computing.

From a business infrastructure standpoint, you can scale the computer power up or down by simple configuration, and only pay for what you use. The containerization of your infrastructure provides another layer of security protections. The ability to define your infrastructure in code allows for more rapid iteration cycles when developing new capabilities.

At TriNet Clarus R+D, we used a cloud service provider’s container repository to store the containers of executable code when developing the latest features for our research and development (R&D) tax credit platform. The containers were then published to the cloud service provider’s container repository, which created a new server cluster each time, drained the users from the old cluster to the new cluster, and then teared down the old cluster. Amazingly, this rolling deployment process can take place while users are still logged in and working in the platform.

Using the mentioned advanced development techniques, exciting new features are rolling out in the TriNet Clarus R+D platform. We’re committed to providing a platform that helps make the process of claiming the R&D tax credit easy and efficient, and these new enhancements will greatly benefit small to medium-size businesses who claim the tax credit by using the TriNet Clarus R+D platform.

AI-Powered Tool for Determining Qualifying R&D Activity and Expenses

One of the most exciting updates is the integration of artificial intelligence (AI) tools to assist clients with the four-part test, which is a crucial aspect of claiming the R&D tax credit. This test determines qualifying activities and expenses for the tax credit. The AI-powered tool makes it simple to enter information into the platform, which helps generate example responses based on the that information. These AI-generated examples will serve as a foundation for crafting unique answers tailored to your specific R&D activities, and they also greatly reduce the amount of time it takes for you to complete the study.

Importing Contractors and Employees

We’re also simplifying the process of adding contractors and employees to the expenses section in our platform. You can now directly import this information from your payroll providers’ platform. This feature helps to ensure the secure access of payroll and contractor data from your preferred payroll platform, and helps to streamline the entire process.

Streamlined Fit-for-Purpose

Our fit-for-purpose workflows are another major enhancement added to the TriNet Clarus R+D platform. You can now add projects with a simple click, directly from a list of commonly qualifying R&D activities specific to your industry. This fit-for-purpose feature will help save time and effort when identifying and including your R&D projects and maximize your tax credits by suggesting activities that you may not have realized qualify for the tax credit.

Advanced Input Checking

To further streamline your experience, our platform now offers advanced input checking. This feature will help identify unqualified activities in your expense descriptions. It highlights words and activities that may not meet the R&D tax credit criteria and provides an explanation message explaining the reasoning. This proactive feature aims to help save you time by notifying you before the TriNet Clarus tax experts review your work, so that you know to adjust your answers in real-time.

Take a look at how going serverless can enhance your computer infrastructure and use the TriNet Clarus R+D Platform to help claim your tax credit for the innovative work that you do.

As companies across the U.S. lean into domestic innovation and technological advances to allow them to stand out amongst competitors, it is increasingly critical to find revenue savings to ensure long-term viability and profitability. As one of the country’s largest tax incentive, the federal research and development (R&D) tax credit can be a crucial piece of a forward-looking economic plan for startups and established businesses alike. But as with all government regulated programs, it is vital to understand what R&D tax credit is all about, how it can impact your business and what to look for in your tax practitioner.

Essentially, the R&D tax credit was created and designed to encourage innovation and allow companies to receive money back for work that they’re already doing. Many businesses are eligible for the R&D tax credit but don’t realize it. Examples of industries that often qualify include software, biotech, manufacturing, and more. Taking full advantage of the R&D tax credit can mean an increase in cash flow and a decrease in effective tax rate.

Although the R&D tax credit has been in place since 1981, it didn’t become a permanent provision until 2015 with the passage of the PATH Act. Not only did this make the R&D tax credit permanent, but prior to 2015, many startups didn’t take the R&D credit because companies could only take it against income tax, and startups generally don’t have income. The PATH Act allowed companies to take the credit against their payroll tax, so businesses did not need revenue to benefit from the credit—they just needed to hire people. This essentially infused billions of dollars in non-dilutive capital into the system, but many companies remained unaware. The recent Inflation Reduction Act has made the R&D tax incentive even more valuable by doubling the credit, such that beginning with the 2023 tax year startups/young companies with less than $5 million in gross receipts can use the R&D tax credit to offset payroll taxes up to $500,000 per year.

In 2020, according to Tax Foundation, $11.8 billion was claimed in R&D tax credits. That means so many companies are continuing to innovate, using their R&D tax credits to reinvest into their businesses to grow and scale. But there are billions more unclaimed likely due to a combination of perceived complexity, audit concerns, and common misconceptions about applicability to a company’s operations.

It is worth noting that small and medium-size businesses (SMBs) often can benefit from R&D credits but only make up a small portion of the businesses actually utilizing those credits. With a combination of education and collaboration, SMBs may be able to take full advantage of these valuable R&D credits.

Complexities Made Simple

One of the most misunderstood pieces of the R&D tax credit program is who qualifies and how. Many startups that aren’t in scientific or technical industries may assume they don’t qualify. In reality, activities in a wide range of industries can generate qualifying R&D expenditures. These categories might include cosmetics, food and beverage, apparel, telecommunications, and more.

Essentially, businesses considering filing an R&D claim must meet four criteria:

1. Qualified Purpose: Are you developing or improving a product, process, formula, or software?

2. Eliminate Uncertainty: Are you asking questions like, “Can we develop it?” or “How do we develop it?”

3. Process of Experimentation: Are you systematically evaluating one or more alternatives?

4. Technological in Nature: Is your work within physical or biological sciences, engineering, or computer sciences?

Chances are, if your company is doing something innovative, that activity and associated expenses may likely qualify for the R&D tax credit.

Another added layer of complexity comes thanks to amortization. As of 2022, the Tax Cuts and Job Act requires businesses amortize their R&D costs over five years, instead of deducting them immediately, according to the Tax Foundation. This doesn’t change the way a company would qualify for, or file for, the claim, it only impacts the company’s application of the credit. But because it can impact the capital return, tax experts at TriNet’s Clarus R+D can help SMBs navigate the entire process.

Avoiding The “A” Word: Audit

Working with a respected service provider may be the best way for businesses to ensure they are compliant and to help mitigate the risk of an IRS audit when filing comprehensive R&D claims. Some of the factors to consider when choosing a service provider for R&D tax credit claims include:

• Finding a service provider with R&D credit experience

Service providers with extensive R&D experience are necessary to ensure a smooth R&D study process. Without extensive knowledge of required documentation and nuances in the tax code associated with this credit, you may be left vulnerable to an IRS audit. Unfortunately, the IRS has vague guidelines on what constitutes sufficient documentation to claim the R&D tax credit. And, as with most IRS matters, the burden of proof is with the taxpayer. A good rule of thumb is to hold on to all documentation relating to your R&D activities in the event of an audit.

• Transparency is key

Be sure to have a thorough understanding of your provider’s fee structure and contingencies. Make sure the professionals you are working with have a reasonable capped rate, and look for the pros who will tier their rate based on the size/volume of your studies. You should also ask questions about success rate and numbers of audits.

• Accessibility, visibility and collaboration

Ensure that you can access and see the process behind your R&D studies regardless of whether your service provider is using pen to paper or advanced software designed to optimize R&D tax credits. Collaboration is also vital. Your input in the study is critical since the details around the process of developing your company’s technology are needed to support an audit that could come three years down the road. Your provider should look for your input in the study but make the process simple and efficient.

Another key factor is having a system in place that understands and aligns with IRS audit process. Teaming up with a provider that offers advanced software and a team of skilled CPAs can deliver the assurance and confidence needed to take advantage of the R&D credits that go unclaimed each year.

The United States relies on innovation woven throughout all industries. Whether a business is a small startup or an established enterprise, the R&D tax credit exists to further propel the kinds of cutting edge thinking that consumers worldwide depend upon. If it is uncharted territory for now, it doesn’t have to stay that way. By partnering with a respected and knowledgeable R&D service provider, a company can reap the rewards of one of America’s largest tax incentive with minimal risk of audit. It’s never been a better time to start enjoying increased cash flow for long-term business stability, viability and growth.

This year, the IRS is providing certain relief for taxpayers in affected disaster-areas.

Disaster-area taxpayers in most of California and parts of Alabama and Georgia now have until October 16, 2023 to file various federal business tax returns and make tax payments for the 2022 tax year*. More information can be found here. Additionally, relief has been provided for victims of weather-related disasters in some areas of Oklahoma, Indiana, Tennessee, Arkansas, Mississippi, and New York.

Taxpayers in the affected areas may not need to file any extension paperwork, and they do not need to call the IRS to qualify for the extended deadline.

Detailed information on tax relief in disaster areas, disaster assistance and emergency relief for businesses is available on the IRS webpage at this link.

The Clarus R+D team of tax experts is ready to help you claim the R&D tax credit and get the money you deserve. Schedule a free consultation here to get started.