Pennsylvania R&D Tax Credit Consultants
The federal research and development (R&D) tax credit is one of the best opportunities for Pennsylvania businesses to substantially reduce their tax liability. Many businesses engage in “qualified research” which enables them to reduce their tax liability by taking advantage of the R&D tax credit. Introduced in 1981, the federal R&D tax credit is the largest tax incentive available to Pennsylvania taxpayers. Furthermore, Pennsylvania has a state sponsored R&D tax credit that can be claimed in conjunction with the federal R&D credit. In order for your Pennsylvania business to be eligible to qualify for the R&D tax credit, it must engage in certain qualified research activities. The best way to learn more about R&D activities and tax credit eligibility is to work with an experienced and well-qualified R&D tax credit consultant. Schedule a free consultation with Clarus R+D to learn more about R&D tax credits and find out if your Pennsylvania business engages in R&D eligible activities. Clarus’ technology-driven solution empowers companies to fuel their growth with America’s largest tax incentive.
Pennsylvania businesses need to take advantage of the R&D tax credit
The research and development tax credit is a government sponsored tax incentive available to companies who conduct research and development within the United States. The credit was implemented as a Congressional response to the decline in research spending which negatively impacted the country’s economic growth, productivity gains, and overall global competitiveness. The R&D tax credit was initially implemented in 1981 and has since been reauthorized several times. In 2015, when the Protecting Americans from Tax Hikes (PATH) Act was adopted, the research and development (R&D) credit became a permanent part of the tax code.
Many taxpayers assume the R&D tax credit is available only to major corporations conducting tests in research laboratories. This, of course, is not the case. Businesses of all sizes across many industries are eligible for the incentive as long as they are engaged in qualified research activities. Under the current tax code, any company that develops or improves products or processes may be eligible for the credit. The number of businesses that engage in eligible activities is ever-increasing as are the eligible activities that qualify for the credit. More and more Pennsylvania businesses are engaged in qualified research activities making them eligible for the R&D tax credit. Clarus R+D is Pennsylvania R&D tax credit consultant of choice to help your business take advantage of the research and development tax incentive.
The R&D tax credit and your Pennsylvania business
Businesses in the United States are battling in an intensely competitive global market. Tax incentives, like the research and development tax credit, are designed to protect American jobs and businesses while spurring ingenuity and innovation. The research and development tax credit helps by allowing you to take advantage of tax credits for the work your Pennsylvania business is already doing. Smart businesses are taking those dollars saved via the tax credit and reinvesting in their growth. Many businesses are unaware expenses related to their daily operations could qualify for a dollar-for-dollar tax credit towards their annual income and/or payroll tax liability, irrespective of industry or company size. Additionally, Pennsylvania offers an R&D tax credit that can supplement the federal R&D tax credit.
For most companies, the credit is worth 7-10% of qualified research expenses. This is a dollar-for-dollar credit against taxes owed. Plus, it carries forward 20 years. For startups, applying the credit against payroll taxes is a valuable, non-dilutive funding opportunity. Eligible expenses for the R&D tax credit include U.S.-based wages, contracting, and supply costs. Most typically, wages are the largest qualified expense, and there must be a nexus between the expense and qualified project.
Determining R&D tax credit eligibility in Pennsylvania
What is considered qualified research for purposes of determining Pennsylvania business’ R&D tax credit eligibility? In order to be eligible for the research and development tax credit, your business must engage in qualified research. Qualified research generally is private sector or commercially driven development intended to yield innovation within a scientific or technological field. The following four part test determines whether an activity is considered qualified research and, thus, eligible for the R&D tax credit.
The purpose of the activity or project must be to create new (or improve existing) functionality, performance, reliability, or quality of a business component. A business component is defined as any product, process, technique, invention, formula, or computer software that the taxpayer intends to hold for sale, lease, license, or actual use in the taxpayer’s trade or business.
Elimination of Uncertainty
The taxpayer must intend to discover information that would eliminate uncertainty concerning the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability of development or improvement, method of development or improvement, or the appropriateness of the business component’s design.
Process of Experimentation
The taxpayer must undergo a systematic process designed to evaluate one or more alternatives to achieve a result where the capability or the method of achieving that result, or the appropriate design of that result, is uncertain as of the beginning of the taxpayer’s research activities. Treasury Regulations define this as broadly as conventional implementation of the scientific method to something as informal as systematic trial and error process.
Technological in Nature
The process of experimentation used to discover information must fundamentally rely on principles of the physical or biological sciences, engineering, or computer science. A taxpayer may employ existing technologies and may rely on existing principles of the physical or biological sciences, engineering, or computer science to satisfy this requirement.
Research activities that qualify for R&D tax credits must be conducted in the U.S. If your Pennsylvania business does any of the following, it likely qualifies for the R&D tax credit:
- Develops or designs new products or processes
- Enhances existing products or processes
- Develops or improves upon existing prototypes and software
Claim the R&D tax credit for your Pennsylvania business
A number of factors go into claiming the credit, but the potential savings on the table make exploring the credit a worthy endeavor. Since the credit may be claimed for current and prior tax years, companies can benefit from documenting their R&D activities to ensure they are positioned to claim the credit in both situations.
To claim the credit, the taxpayer must contemporaneously evaluate and document their research activities to establish the amount of qualified research expenses paid for each qualified research activity. While taxpayers may estimate some research expenses, they must have a factual basis for the assumptions used to create the estimates.
Examples of such documentation include:
- Payroll records
- General ledger expense detail
- Project lists
- Project notes
- Other documents a company produces throughout the regular course of business
Pennsylvania Research and Development: The state R&D tax credit
The Pennsylvania state R&D tax credit very nearly mirrors the federal R&D tax credit. There are, of course, some differences – the most significant of which are outlined below:
- Pennsylvania caps its total R&D credit at $55 million ($11 million set aside for qualified small businesses)
- The credit rate in Pennsylvania is 10% (20% for qualified small businesses)
- Pennsylvania offers a modified Alternative Simplified Credit
- Qualified research must take place in Pennsylvania
- Unused Pennsylvania research credits can be carried forward for fifteen years
- The Pennsylvania credit cannot be carried back
Eligibility to apply
Taxpayers must meet four criteria in order to submit an application to the Department of Revenue by the September 15 deadline for the R&D tax credit in Pennsylvania:
- Must be an entity subject to personal income tax or corporate net income tax
- Must have research expenses incurred for qualified research and development conducted within Pennsylvania
- Must be in state tax compliance with the laws and regulations of the Commonwealth as determined by the Department of Revenue
- Must have at least two years of R&D expenditures
IRS statistics show that R&D tax credits worth over $12 billion were claimed in 2014. While this sounds significant, a large number of eligible entities neglect to claim the R&D credit. One of the biggest drivers for the underutilization is likely a lack of knowledge by both taxpayers and their advisers. Many are unaware of the R&D credit or otherwise believe their business activities are not eligible.
R&D tax credit consultants: What to expect
You can expect the following when selecting Clarus R+D as your R&D tax credit consultants:
- Clarus provides a team of professionals with expert credentials able to answer all your R&D tax credit questions.
- Our proprietary software streamlines R&D studies which maximizes your ROI.
- Clarus has expert knowledge of the IRS regulations relating to the research and development tax credit, IRC Section 41, as well as the regulations pertaining to state-specific research and development credits.
- Clarus has extensive experience in recognizing qualified research activities and expenditures.
- Our time-proven methodology has yielded maximum benefits to our clients.
- The Clarus team has helped hundreds of clients claim millions in R&D tax credits.
- We place emphasis on helping growth businesses take advantage of the tax incentive.
- Clarus does the work for you; our web-based app allows you to enter information at your own pace.
- We have extensive IRS and state audit experience, and provide our clients audit support.
- We have maintained an exceptional success rate in applying for the R&D tax credit.
- We work directly with our clients and their respective accounting firm and payroll processor.
- Our process saves valuable time and resources within the engineering and finance departments.
- Our fees are very competitive.
- Our performance, success rate, and unparalleled quality of service result in high client loyalty.
Ready to get started?
Schedule a free consultation with our team of experts to learn more. We’ll discuss the R&D tax credit and help you determine if our solution is a fit for your company.
ABOUT CLARUS R+DWith custom software backed by a team of tax experts, Clarus R+D specializes in tax credits for growth businesses. Our technology-driven solution simplifies the process, maximizes benefit, and ensures compliance. We partner with accounting firms, financial advisors, investors, payroll providers, and more.