Speaking with Sadeq Ali, co-founder of Archimydes and The Fourth Act podcast, I share how Clarus R+D helps businesses easily obtain R&D tax credits for any software development or product development work done in the US.

The Fourth Act is focused on the intersection of the future of work, innovation, and software development.

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The R&D tax credit incentivizes certain research activities by reducing a company’s liabilities for spending money on that research. Expenses that qualify are more comprehensive than you may think. Qualified research expenses (QREs) can include the salaries of employees and supervisors who are conducting research, supplies, and even some contractors. Congress created the “Four-Part Test” that determines eligibility for the credit.

• Qualified Purpose
• Technological in Nature
• Elimination of Uncertainty
• Process of Experimentation

Expenses that qualify for the R&D tax credit are more comprehensive than you may think.

Are you developing or improving a product, process, formula, or software?

To pass this requirement, the activity must create or improve a product, process, formula, or software with respect to its functionality, performance, reliability, or quality. You must intend to use it in your business or retain intellectual ownership. Even if the activity was not successful, you may still qualify for the R&D tax credit.

Is your innovation technological in nature?

If your innovation relies on hard sciences such as physical sciences, biological sciences, computer science, or engineering, then you can answer yes to this question.

These sciences cross many industries. Certainly, biological science is used in life sciences – like pharmaceutical and medical device companies. However, it could also be used in food science and bio-flavoring. Engineering could apply to toy companies that engineer products to work properly or design circuit boards for robotic toys. Computer science is not limited to Silicon Valley tech companies. It can also apply to almost any hardware or software solution in any industry.

Have you eliminated uncertainty in the development of your component?

You must demonstrate that you’ve attempted to eliminate uncertainty. Your innovation must go beyond cosmetic design and seek to improve functionality by gaining information and reducing ambiguity associated with its development.

Did you experiment or test alternatives?

You must be able to show that you have explored alternatives to achieve proof of concept. Through modeling, simulation, systematic trial and error, or other methods, you must have evaluated alternatives for achieving the desired result.

Exclusions

Even if your work passes the four-part test, there are a few exclusions to the R&D tax credit. Expenses incurred under the exclusions will not qualify for the incentive. Some of these already appear in the four-part test, including the need to rely on hard sciences.

The activity must take place in the U.S. and cannot include routine data collection or market research. Also, activities cannot receive funding from an unrelated third party because your company might not retain ownership of the resulting intellectual property.

If you think your work qualifies for the R&D tax credit, our team of experts is here to help.

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Payroll tax deferral

The CARES Act was crafted to provide liquidity for businesses suffering from the effects of the COVID-19 outbreak. One provision postpones the employer portion of certain payroll taxes imposed in 2020. These will then be paid back in two installments:

• 50% due on December 31, 2021
• 50% due on December 31, 2022

R&D tax credit

For companies that opt to defer payroll taxes, R&D payroll tax incentives add value since excess credit amounts can reduce future obligations. Companies with SBA loans that are not eligible for COVID-19 payroll tax relief can still use R&D credits to offset FICA. Businesses that will soon age out of R&D payroll tax credits may opt to use them now and forgo the CARES Act deferral entirely.

R&D payroll tax incentives add value to maximize cash savings.

To maximize cash savings, companies should consider R&D tax credits as a part of their payroll relief options with COVID-19 aid packages. Certain eligibility requirements must be met to take advantage of the payroll tax incentive. Clarus R+D can help you navigate recent legislation to ensure you capture all available cash savings opportunities.

Clarus R+D announces its platform integration with Gusto, a payroll company based out of San Francisco and Denver. By partnering with Gusto, Clarus provides a full-service solution that optimizes R&D studies. Together, Clarus R+D and Gusto are committed to helping entrepreneurs and accountants every step of the way.

Get started with Gusto payroll

With the secure import of payroll data, this new integration makes it easy for mutual customers to quickly calculate and document the R&D tax credit. Customers also receive free real-time processing, which means R&D tax credits are applied with every payroll run instead of quarterly against overpaid taxes. Companies monetize R&D tax credits up to four months faster with real-time processing.

Free real-time processing is huge. it means faster monetization of R&D tax credits for our customers.

About Gusto, a Clarus R+D preferred partner

More than 100,000 small businesses and 3,000 accountants nationwide choose Gusto because it’s refreshingly easy to use, has friendly, expert customer service, and is loved by both employers and employees. In fact, 9 out of 10 customers say Gusto is easier than other payroll providers.

• 85% of customers say Gusto is easier to use than their previous payroll provider.
• 3 out of 4 customers say Gusto makes compliance easier.
• You can manage your payroll, benefits, 401(k), workers’ comp, and HR all in one place – and keep them all in sync.
• Gusto integrates with accounting, time-tracking, and expense software to keep your business in sync.

As you invest in research and development this year, you can take steps now that will simplify the process of conducting your R&D study in 2021. Recent legislation changes have significantly impacted entrepreneurs. To optimize filing strategies, pay careful attention to all of your tax actions.

1. Identify Activities that Qualify for the R&D Tax Credit

If you do anything technology-based, improve it, and sell it, you probably qualify for both federal and state R&D tax credit. Many companies perform activities that qualify for the R&D tax credit without even knowing it. Examples of qualifying activities include:

• Designing, developing, or improving new products, processes, formulas or software or improving current ones
• Experimenting with code for new or improved software products
• Engineering to evaluate specifications for performance, reliability, quality, features, and durability
• Developing new production processes, including agile
• Improving a product’s time-to-market through more efficient designs
• Paying outside consultants or contractors for any of the above activities
• Incurring expenses for wages or supplies related to the above activities

2. Gather Documentation to Support R&D Tax Credit Claims

Step one in optimizing R&D tax credits is to Identify eligible activities. Step two is to show documented proof of all qualifying activities. You are able to estimate some qualifying expenditures. However, you must base this estimate on facts. Examples of documentation to include:

• Eligible employee wages
• Payroll registers
• Time tracking data
• Job descriptions
• Meeting minutes
• Ledgers outlining general expenses
• Relevant project lists and notes

Our team of R&D tax credit specialists is here to help. We partner with business owners across various industries to assist with R&D tax planning to help you optimize the benefit for your organization. Contact us today to schedule a free consultation with one of our tax experts.

Companies across many industries qualify for the research and development (R&D) tax credit. However, claiming the R&D tax credit requires backing up your eligibility with the right documentation. Companies often misunderstand what constitutes required documentation for the R&D tax credit. A simple general ledger line item that says “research expenses” will not do.

Documentation Don’ts

In April 2019, the Siemer Milling Company lost a federal case against the IRS in defending its R&D tax credit. Lack of documentation was a large part of the reason for the court disallowing over $235,000 in R&D tax credits claimed by Siemer Milling. The court ruled Siemer Milling failed to retain and provide supporting documentation demonstrating how the company’s activities met the four-part test necessary to constitute qualified research. The company stated it was involved in new product development. However, merely reciting the steps taken was not enough to show they had a methodical plan involving a series of trials to test a hypothesis for developing new products. They offered no documentation to demonstrate how the activities showed experimentation in the scientific sense.

when claiming the R&D tax credit, you have a responsibility to make sure it’s defensible by adhering to IRS guidelines.

The rules outlining the documentation requirement are outlined in Treasury Regulation Section 1.41-4. The IRS publishes an audit technique guide that provides 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

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 the 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.

detailed and clearly written reports are your best defense during an audit.

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.

Key Takeaways

The best way to reduce business risk when claiming the R&D tax credit is to partner with experienced R&D tax professionals to oversee your calculation and documentation process. R&D tax specialists will work through your projects to determine all qualifying expenses. In the event you are audited and asked to produce documentation, they will submit all necessary reports to the IRS, answer any questions, and keep your business interests protected.

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 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 Clarus R+D comes in. We help you claim R&D tax credits without stress or confusion.

With so much news hitting everyone’s inboxes, I want to focus on moving forward and helping. Let’s filter out the noise and breathe. Here’s a list of three things that can help you and your business right now.

IRS extends and gives us some breathing room.

We caught a break when the tax filing date was extended to July 15. With our attention elsewhere, the IRS has extended the tax filing date to allow “all taxpayers and businesses [to] have this additional time to file and make payments without interest or penalties,” according to a tweet from Treasury Secretary Steven Mnuchin.

File early to monetize faster.

Even with the extension, taxpayers are encouraged to file now to get money back sooner. And at a time when businesses are looking for liquidity to continue innovating, this is particularly important to our customers.

Gusto shares financial resources for small businesses.

In addition to the R&D tax credit, our partner Gusto has compiled a comprehensive list of public and private loans, grants, and financial support programs aimed at small businesses. Gusto will update this spreadsheet regularly with financial resources for small businesses. Check back for the most current information, and share it with a business owner who may benefit from the support.

Our team of R&D tax credit specialists is here to help you understand how the current events affect your R&D tax credit. Contact us today to schedule a free consultation.

As the coronavirus wreaks havoc on the global economy, President Trump has proposed to cut the payroll tax for employees to zero for the rest of 2020. Money taken in from payroll taxes goes to Social Security, Medicare, and unemployment insurance. Salaried workers pay 6.2% of their gross annual income up to $137,700 for Social Security. Employers also pay a 6.2% tax.

The proposed payroll tax cut does not affect employers or their R&D tax credit. At this point, the proposed payroll tax cut is for employees only and is meant to incentivize individuals to buy goods and services amidst an economic downturn. President Trump believes the spread of COVID-19 could cripple economic growth by decreasing consumer spending and ultimately hurting businesses.

The proposed payroll tax cut does not affect employers or their R&D tax credit.

It is important to note the proposed payroll tax cut is just that – a proposal sparking conversation on how to halt further economic downturn due to the COVID-19 outbreak. President Trump’s proposal also includes allowing Americans to delay filing their tax returns in April, reimbursing people or companies for sick leave, and providing aid to the travel industry. There have not been any specifics on how this would be implemented.

One thing is for certain, there is significant interest in a bipartisan proposal. Both Republicans and Democrats want to see something done quickly that will benefit the US economy.

Our team of R&D tax credit specialists is here to help you understand how the current events affect your R&D tax credit. Contact us today to schedule a free consultation with one of our tax experts.

If you think your company might qualify for the R&D tax credit, don’t let the potential tax savings go unclaimed — and don’t be intimidated by the thought of an R&D study or documentation requirements. Across a wide variety of industries, qualifying activities can be found. If you’re willing to take a look, you could uncover non-dilutive funding to reinvest in your business and fuel your innovation with these tax savings.

By claiming the R&D tax credit, you have a responsibility to make sure your tax documentation is defensible. The laws and regulations require it and the penalties for not complying can be severe. Too often, we see companies claim the R&D tax credit without creating proper nexus between expenses and projects. Thorough documentation is the answer to this issue. That’s where Clarus R+D can help. Our tax credit software automatically calculates the credit, as well as generates all required documentation. No more stress or confusion about how to properly claim R&D tax credits.

Clarus R+D software automatically calculates your R&D tax credit, as well as generates all IRS required documentation.

What is the R&D tax credit?

The federal R&D tax credit has been around since 1981 but was made permanent by the PATH Act of 2015. This legislation also opened the door for small businesses that were not profitable to benefit from the credit. In addition, new offsets for the alternative minimum tax and payroll tax made way for even more companies to receive a benefit for their research activities.

Generally, large companies account for a significant portion of the overall research performed and the credit dollars claimed each year. Yet, it’s important to note that the R&D tax credit isn’t just for large companies with established R&D departments. Any company that develops new or improved products, processes, or software could qualify under the US tax code – whether developed successfully or not.

How can I monetize the R&D tax credit?

The R&D tax credits can be used to offset:

• Income taxes if you are in a taxable position.
• Alternative Minimum Tax (AMT) if you have average annual gross receipts for the prior three years of $50 million or less, and you owe AMT in the current year.
• Employer portion of Social Security taxes up to $250,000 for each fiscal year if you are a qualified small business. This payroll tax offset allows qualified small businesses to receive a benefit for their research activities regardless of profitability.

Do I qualify for the R&D tax credit?

Regardless of industry, size, or revenue, any business that performs activities meeting the following four tests qualifies for the R&D tax credit:

• 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 on a qualifying project began 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.

What expenses qualify for the R&D tax credit?

Taxable wages for employees who perform qualified activities or employees who directly supervise and support those individuals can qualify. A portion of payments for US-based contractors also qualifies. In addition, supplies used in qualified R&D activities, contract research, computer leasing, and cloud-based services could all be eligible for the R&D tax credit. If cloud-based provider activities relate to R&D activities, such as testing or development in the cloud, a portion of payments may qualify.

The federal tax credit can be as much as 10% of the qualified spend. In addition, many states have their own R&D tax credit programs. These states have varying incentive amounts. Some state R&D tax credit programs resemble the federal program governing what types of activities and expenses are eligible.

The federal tax credit can be as much as 10% of the qualified spend. In addition, many states have their own R&D tax credit programs.

What documentation do I need to claim the R&D tax credit?

First off, assess all of your company’s activities for potential eligibility. Then, begin tracking expenses and gathering documentation. Documentation is an important part of protecting yourself in case of an audit. It must be done right to prevent penalties and limit liability.

Documentation should validate that the expenditures claimed are eligible for the credit. It needs to:

• Be dated to prove that the work occurred in the fiscal year you are claiming
• Highlight technical challenges to substantiate that the R&D was done

Documentation can include:

• Timesheets
• Version control for all technical documents
• Prototypes, including software and physical products
• Test documents
• Developer or Engineering Notebooks
• Meeting minutes
• Whiteboard photos
• Emails
• Invoices/ receipts
• Contractor agreement outlining statement of work

What if I don’t have a tax liability?

If you are conducting qualified R&D projects, it’s beneficial to claim the R&D tax credit regardless of your company’s taxable income. R&D tax credits can be carried forward to offset future income tax liability. Typically, credits that can’t be used immediately will carry forward for up to 20 years. Also, companies can often claim the R&D tax credit retroactively by filing amended returns.

Can I offset payroll tax?

Qualified startups can claim up to $250,000 against payroll taxes each year. These businesses can use the R&D credit to offset payroll taxes for up to five years, with a maximum of $1.25 million in total credits used on quarterly federal payroll tax returns. Whether or not your startup is profitable, you may qualify for the payroll tax offset if you have less than $5 million in revenue and are within five years of your first gross receipt. Also, it is important to note that unless you claim with the original filing, you will not be able to take the payroll offset.

What about the Alternative Minimum Tax?

Credits can now immediately reduce a company’s tax liability, freeing up cash that can be reinvested in the company. Companies whose R&D credits may have been limited by the AMT in the past can now use the R&D tax credit to fully offset AMT without regard to tentative minimum tax. Eligible small businesses are sole proprietorships, partnerships, and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.

What do I need to file the R&D tax credit?

The R&D tax claim needs to be submitted with your annual corporate tax filing. Here are all the necessities:

• Form 6765, Credit for Increasing Research Activities
• Form 3800, General Business Credit. This form has a line that asks for the amount of Credit for Increasing Research Activities.
• Each state will have its own form if it offers a state R&D tax program.
• If you qualify for the payroll tax offset, you will need to make sure you account for it on Form 941, Employer’s Quarterly Federal Tax Return. You will also need to fill out and attach Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities.
• Documentation requirements as stated in I.R.C. § 41

Our team of R&D tax credit specialists is here to help. We partner with business owners in various industries to assist with strategies that can help you optimize the benefit for your organization. Contact us today to schedule a free consultation with one of our tax experts.

Cloud computing has made it cheaper and easier to experiment, research, and innovate. Companies investing in cloud-based innovation may be able to take advantage of federal R&D tax credits to support their projects. Cloud computing services have been an important driver in innovation — fueling business growth at an unprecedented cost and scale.

Cloud computing is a method of outsourcing IT functionality to a virtual environment that allows flexibility and scalability in response to supply and demand – Infrastructure as a Service. This creates efficiencies in the software development process through on-demand access to compute and storage resources. By reaching customers on a global scale, it can significantly shorten the software development life cycle. It is safe to say that cloud computing generates major business opportunities. Top cloud computing companies include Amazon Web Services (AWS), Microsoft Azure, and Google Cloud.

In order for cloud computing expenses to qualify for the R&D tax credit, expenses may be either in-house or contracted research. Qualified expenses must:

• Be useful in the development of a new or improved business technology
• Undergo a process of experimentation

Qualified expenses are not for simple file storage, mail hosting, or other similar activities. It is important to differentiate what portion of the payments are for hosting software under development versus payments for hosting a production software version. The estimate can be provided using a business judgment approximation.

In addition to enhancing productivity, cloud computing serves as an important platform for innovation. Companies engaged in cloud-based innovation are strong candidates to receive federal R&D tax credits for these expenses.

Our team of R&D tax credit specialists is here to help. Contact us today to schedule a free consultation with one of our tax experts.