Are you eligible for the Research and Development Tax Credit? Our parent company, CohnReznick, shares industry expertise for GovCons about the credit and its benefits.
Opportunities for the Government Contracting Industry
Government contractors that design and develop new or improved products or processes can realize substantial tax savings with the Research and Development (R&D) Tax Credit. To promote competition in the global marketplace, the R&D credit incentivizes innovation within the United States and is essentially an activity-based jobs credit.
Many government contractors are unaware that their everyday activities may make them eligible for the credit. These activities are generally those undertaken to improve products or processes — by introducing new functionality, higher quality, or better performance — as well as activities performed to develop new products, software, or automated manufacturing lines.
The R&D tax credit tax provision allows companies to capture expenditures associated with employee wages, outside contractors, and supplies consumed throughout the development process. It is these costs that essentially get converted into a tax credit.
Benefits of the R&D Credit
There are many advantages of the R&D credit, including:
- Increase cash flow and immediately reduce current year income tax liability
- Qualified Small Businesses can offset up to $250,000 of the FICA employer portion of payroll tax
- Owners of Eligible Small Businesses can offset alternative minimum tax (AMT) liability
- Returns can potentially be amended to claim credits in prior years
- Permanent tax savings and reduction of overall effective tax rate
- Many states offer R&D tax credits that can be claimed in addition to the federal R&D tax credit
Some companies that are already claiming the credit do not realize that they are incorrectly computing their potential benefit. It is highly recommended to contact professionals to review the R&D tax credit analysis.
Does Your Manufacturing Business Qualify for R&D Tax Credits?
The tax code provides a broad definition of qualified R&D activities. Efforts related to product or software development are common. However, numerous activities, such as new or improved manufacturing processes, may also qualify. In fact, many companies are not aware that they are conducting activities that are eligible for the R&D credit. Typical activities that may qualify for the R&D tax credit include:
- Design and development of new or improved products, equipment, and manufacturing processes
- Design and implementation of new/improved software and manufacturing technologies Automation, streamlining, and software development
- Design, development, and testing of prototypes
- Evaluation of new or alternative materials
- Designing tools, jigs, molds, and dies
- Customizing equipment or machinery
Research is typically either internally generated or performed pursuant to a contract. For purposes of the R&D credit, however, not all contracts are created equal. This is to avoid “double-dipping” by a contractor and a contractee both claiming the credit for the same activity. For this reason, a contract analysis should be performed to determine whether research is “funded.” Expenses related to “funded” contracts are excluded from the R&D tax credit. However, not all government contracts are funded.
- Good Contracts (Not Funded)
- Company retains substantial rights to the results of the research (even if the government has rights to the research as well)
- Company is at economic risk for its R&D (work performed under fixed fee contracts)
- Bad Contracts (Funded)
- Contract provides the government exclusive rights to the results of the research
- Company is paid whether or not research is successful (hourly, cost plus, cost plus fixed fee, cost plus guaranteed max, time and material, and cost reimbursable contracts)
R&D Tax Credit Expertise
CohnReznick’s R&D Credit Group can provide your business with an R&D tax credit estimate at no cost or obligation. This analysis can include discussions with senior management responsible for development efforts and an evaluation of available development documents. Based on this information, we can model your available credits for each year and jurisdiction, and thoroughly explain the results of our preliminary analysis. If sufficient benefit exists to warrant a full analysis, we will design a work plan that best fits your company’s needs and budget.
Examples of successful R&D credit efforts:
- 40 engineers
- Federal and State R&D Credits of $1,600,000
Data Processing and Software Developer
- 20 software developers and business analysts
- Federal R&D Credits of $110,000
Manufacturer of Electromedical Instruments
- 55 engineers and software developers
- Federal R&D Credits of $260,000
Let the team at CohnReznick review your business to ensure you are maximizing your available credit! As the R&D tax credit is complex, we can ensure you are capturing all available benefits while mitigating potential audit risk.
Contact CohnReznick today!