Tax-paying organizations are allowed to claim the R&D tax credits for qualified research expenditures, which cover more than you might think.

Tax-paying organizations are allowed to claim tax credits for qualified research and development (R&D) expenditures, according to the IRS. These tax credits can help businesses stay competitive in changing markets. After all, businesses need to invest in order to grow. The R&D tax credits can help many organizations make money in the future with less money spent today.

The Benefits of Tax Credits

Generally speaking, in tax terms an expense or tax deduction reduces taxable income, which in turn reduces the amount of tax owed. With capitalization, the costs of an expenditure are spread out over the useful life of the investment, turning a one-time cash outlay into a series of smaller expenses over several years (depreciation and amortization). This allows organizations to realize the tax savings right away, making it valuable. A tax credit can be even more valuable than an expense or deduction. A tax credit, like the R&D tax credit, reduces the amount of taxes already owed, leading to bigger tax savings.

According to the IRS, the range of costs allowed for the federal R&D tax credit is broad. They do not have to relate to the nature of the product or improvement being developed, nor to the amount of technological advancement. Instead, they can include costs for work on formulas, inventions, patents, pilot models, processes and techniques. Often, finance leaders and their tax advisers find that some business expenses actually qualify for the R&D tax credit, helping their organization save money for future investments.

How to Use the Tax Credit

According to IPC, there are operational costs that may qualify as R&D expenses under the IRS. For example, investments in process improvements — including wages paid to employees working on qualified R&D activities — could be included as a Qualified Research Expenditure (QRE) under applicable laws and regulations. Qualified R&D expenditures included the costs incurred by electronics manufacturers looking to comply with the EU's hazardous substances regulations.

Qualified Research Expenditures

The IRS does audit to make sure that organizations taking QRE credits actually qualify for them. According to IPC, finance leaders should be sure that documentation exists to show the goal is to discover technological information that their organization doesn't already have (or improve something they already have), that there's a level of uncertainty related to the work, that costs are directly attributable to this process of experimentation and that the research has a general business purpose.

In other words, you probably can't use the tax credit for an off-the-shelf solution, but you probably could use it if you had to try a few things before finding something that worked for your business. The R&D tax credit is designed to help organizations stay on top of their markets. If it saves you money, so much the better.

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