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.

Clarus R+D has partnered with Alice, a digital platform that makes smart, instant connections between business owners and the resources they need to accelerate sustainable growth and global impact. Alice works by matching companies with opportunities, locally and online, that will help them start and grow a business.

Clarus R+D is a technology-driven solution for claiming R&D tax credits, making it easy for innovative companies to get this money back into their businesses to hire and grow. By partnering with easily accessible online business advisors, Clarus is broadening the impact of America’s largest tax incentive.

Clarus R+D will be working with the Alice team to educate its community on the R&D tax credit, how to claim it, and ways to maximize its benefit. R&D tax credits are a remarkably effective way to access cash for small businesses. But the process can be intimidating. Clarus R+D removes all the barriers and helps innovators every step of the way.

Read Alice’s guide to claiming the R&D tax credit

With tax season just around the corner, business owners will begin the sometimes harrowing task of filing their 2019 taxes. We understand that year-end tax planning can be overwhelming for startups and SMBs. With the passing of the Tax Cuts and Jobs Act (TCJA) of 2017, tax legislation changes have significantly impacted entrepreneurs. To optimize filing strategies, pay careful attention to all of your year-end tax actions. So what steps can you take now to simplify the process and maximize your tax credit?

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

Remember, if you do anything technology-based, improve it, and sell it to customers, 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 realizing it. Some 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

Identifying eligible activities is the first step in optimizing tax credits associated with R&D. The next step is to show documented proof of all qualifying activities. The credit can be claimed for the current and prior tax years, which makes it important to document eligible operations for all of the years the credit is claimed. Also, you can estimate some qualifying expenditures. However, you must base this estimate on facts. Examples of documentation to compile:

• 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 in various industries to assist with year-end planning 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.

Does your company operate in a state that could reward you for things you’re already doing? About forty states have their own R&D tax credit programs, with some even more valuable than the federal tax credit program. Since each state tax credit is different, it’s good to know whether your company can save through R&D.

Evidence shows state R&D tax credits have a significant effect on the rate of local entrepreneurship.

To promote growth and development, many states offer an R&D tax credit in addition to the federal tax credit. But unlike the federal program, some of the state tax credits are refundable, some are transferable, and still some are in states with attractive credit “buyback” opportunities. The definition of qualifying research activities may be similar, but the tax credit computation and other factors vary significantly from state to state.

The research and development tax credit is complex. From California to Pennsylvania to Georgia, we have expertise in many state level programs, as well as the federal R&D tax credit. To evaluate where you may be able to save on taxes and how you can use R&D incentives to boost your company’s bottom line, schedule a call with one of our tax experts. We’ll discuss R&D tax credit programs to help you determine eligibility.

Each year, the IRS publishes a Dirty Dozen list of common schemes taxpayers may encounter. Coming in at #7 on this year’s list, the IRS continues to see significant misuse of the research credit. Meant to provide an incentive for American industry to invest in research and experimentation, this credit has legitimate uses but there are specific criteria to qualify.

Clarus specializes in helping startups with the R&D tax credit. We simplify the process while maximizing the financial benefit. Most importantly, we do it right. We generate the proper documentation and partner with your tax preparer and payroll company to check all the boxes.

IRS Dirty Dozen 2018

1. Phishing
2. Phone Scams
3. Identity Theft
4. Return Preparer Fraud
5. Fake Charities
6. Inflated Refund Claims
7. Excessive Claims for Business Credits
8. Falsely Padding Deductions on Returns
9. Falsifying Income to Claim Credits
10. Abusive Tax Shelters
11. Frivolous Tax Arguments
12. Offshore Tax Avoidance

For more detail on this year’s Dirty Dozen, head over to the IRS newsroom.

Clarus R+D has partnered with Gusto, a payroll company based out of San Francisco and Denver. Gusto is fundamentally changing how the world works by empowering everyone to put people first. Gusto reimagines payroll, benefits, HR, and personal finance by automating the most complicated, impersonal business tasks and making them simple and delightful.

Clarus R+D is a technology-driven solution for claiming R&D tax credits, making it easy for innovative companies to get this money back into their businesses to hire and grow. By partnering with payroll processors, Clarus provides a “full service” solution that ensures customers monetize their credits.

Clarus will be working with the Gusto team to efficiently process their mutual customers’ tax credits and streamline the monetization process.

Recent changes to the federal R&D tax credit program provide a remarkably effective way to access cash for early-stage companies. But the process can be intimidating. Clarus removes all the barriers and helps entrepreneurs every step of the way.