In our current economy, every company is facing a challenge. Staffing shortages continue to plague all industries. Supply chain woes are halting production. Inflation is rising. It can be tough to keep your head above water, let alone innovate and grow. But that's exactly what companies need to do to meet modern challenges, overcome obstacles, and come out on top.
By focusing on research and development (R&D), companies have an opportunity to align innovation with strategy. Understanding your customers' needs and the market's direction allows your organization to develop products and services that will meet those needs and put you ahead of the curve.
There are significant tax advantages for businesses engaged in R&D, such as the R&D tax credit, which can substantially reduce your organization's tax liability. While the incentive is lucrative because it significantly lowers a company's tax burden, the complexities it brings make it necessary to ensure a defensible stance with the help of tax professionals. Recent legislation has been proposed to double the claim amount of the tax credit, making now an excellent time to maximize the strategic value of R&D in your organization.
The Evolving Role of R&D
For many companies, the role of R&D has changed in recent years. In the past, R&D departments were primarily focused on scientific advancement, working to create new products and technologies that would give their companies a competitive edge. However, as the business landscape grows more complex with recent challenges and as consumer demands evolve, the focus of R&D has shifted in a more strategic direction. Many companies now realize the value in aligning R&D with business goals, creating more sustainable products to meet ethical expectations, and responding quickly to changes in the marketplace.
Take, for example, two unique challenges facing today's business landscape: the Great Resignation and supply chain disruptions. How can R&D be used to address those issues?
To start, creating automation tools, particularly in the manufacturing industry, is expected to be a primary focus of R&D this year. Automation helps improve efficiency, reduce error, and cut costs. It also gives employers more room to pave new career paths for employees and create more substantial organizational roles that attract talent.
As for the supply chain crisis, R&D innovation can help derive technology and processes to provide production analysis, establish timelines, and streamline manufacturing operations. As raw materials become harder to procure, replacement raw materials may require iterative changes to the manufacuring process. If the manufacturing process is modified, the potential for a qualified R&D credit increases.
No matter the industry, R&D can harmonize your organization's vision and goals with the market's demands, allowing you to provide solutions to help individuals or businesses thrive.
Taking a Defensible Stance
The R&D tax credit can save a company hundreds of thousands of dollars, but it's not an easy process. The credit is very complex, and firms often struggle to navigate the eligibility requirements and claims process.
In a broad sense, R&D activities qualify if they meet the following four requirements:
- Qualified Purpose: The activity must be new or improve the functionality, performance, quality, or reliability of a product, process, software, technique, formula, or invention.
- Technological Uncertainty: There must be uncertainty regarding the ability to develop a new product or process. The uncertainty addresses capability, method, or design.
- Process of Experimentation: To eliminate uncertainty, the process involves documenting a hypothesis and evaluating that hypothesis through modeling, simulation, systematic trial-and-error, or other methods.
- Technological in Nature: The research must be based on hard science, such as engineering, physics, chemistry, biology, or computer science.
While the R&D tax credit qualifications seem straightforward, many rules and regulations must be followed to take advantage of the credit, and it can be challenging to keep track of them. As a result, it is often beneficial to seek the assistance of a qualified tax professional when preparing an R&D tax credit. A reputable tax advisor will thoroughly understand the credit and help ensure all the necessary documentation is available and on file. In addition, a reputable R&D tax specialist can also offer guidance on maximizing the credit and minimizing the risk of an audit.
A professional on hand will be even more valuable given that R&D expenses saw significant changes this year. For tax purposes, companies are now required to capitalize and amortize R&D expenses over five years for research performed in the U.S. and over 15 years for research conducted outside the U.S. Due to these changes, costs and benefits associated with R&D expenses will become more difficult to evaluate, requiring careful assessment and planning.
Proposed Legislation on the Horizon
If your organization is considering utilizing the R&D tax incentive, now is a great time to do it. A proposed bill—the FIRST Act—aims to double the R&D credit from 20% to 40% for companies who are claiming the traditional method and doubles the alternative simplified credit method from 14% to 28%. For startups with no history of R&D claiming the alternative simplified credit method, the R&D credit would increase from 6% to 14% of R&D spending. The goal of the proposed change is to encourage more American companies to embrace innovation and become leaders in the global marketplace.
If signed into law, the bill would be effective on Dec. 31.
At CBIZ, we have a dedicated team of R&D tax credit experts ready to help your organization navigate the complex process for this valuable incentive. We'll work with you to identify eligible expenses and calculate the credit, so you can get the most significant benefit possible. Contact us today to learn more about how we can help you with the R&D tax credit.