Research and Development credits are not just for big business. Small businesses can also qualify and even better they can use those credits against payroll taxes as well as income taxes. In addition, over 35 states have additional credits that can be used. The federal tax R&D credit is a permanent part of the tax code so this will not go away every time elections roll around.
There is a 4-part test to see if you qualify
- Create a new or improved business component (it must improve the functionality, durability, or quality of the product)
- There must be a component of uncertainty – will it actually work
- There must be a process of experimentation
- It must be technical in nature
There are some exclusions that will not allow you to take the credit
- It can not take place outside of the US
- It can not already be in commercial production – once it is available it is no longer in development
- It can not be something you have reverse engineered from any source – now if you develop a similar product and can prove it was independent and not reverse engineered it could qualify
- It can not include any marketing activities such as feasibility studies
- It can not be a change simply for looks – in other words changing the color to make it more appealing is not R&D
- It cannot be funded by an outside source – you must be the one taking the risk of this not working
Do you have a project you want to take on and are not sure if you would qualify, schedule a time to discuss your project now.