First enacted in 1981, the Research & Development (R&D) Tax Credit is one of the most valuable tax credits available to businesses today. In the past, the R&D credit had expired and was subsequently extended 15 times before it was made permanent with the PATH Act of 2015. Its permanent status makes planning much more feasible for businesses intending to apply for it.
And apply they do! In fact, U.S. companies claim $7.5 billion in R&D credits annually. While many large companies have taken advantage of the credit for years, small and midsized companies can also qualify.
The Results: Big Tax Savings!
Over the past 30 years, there have been a number of changes in how the credit is calculated and which activities qualify. Contrary to popular belief, the research tax credit isn’t limited to high-tech, biotech, and pharmaceutical companies. Many businesses do not realize that many of the day-to-day activities associated with agriculture and farming fit within the definition of activities that qualify for the R&D tax credit. Recent court cases have confirmed that businesses no longer are required to develop technology that is new to their industry; instead, the regulations now require that the technology or process be new to the taxpayer.
The R&D credit has applicability to agriculture and farming in the following areas:
- Development of new strains or cross-breeding of products with improved nutritional value
- Development/improvement of new harvesting techniques and/or soil development
- New or improved processes to increase yield upon harvest
- Development/improvement of fertilizers, irrigation systems, etc.
- Development of methods and techniques to protect crops from disease and/or pest control
- Development/improvement of custom equipment configured to operate in specific environmental conditions
- Development and/or implementation of automated processes
- Development or experimentation with new cultivation techniques
- New or improved feeding or breeding techniques for livestock
- Development of monitoring capabilities for field conditions
- Improvement to facilities resulting from environmental and/or safety efforts
Expenditures that qualify for the tax credit include:
- Taxable wages paid to employees for services performed in conducting, immediately supervising, or directly supporting qualified research.
- Amounts paid for supplies used in qualifying research.
- Sixty-five percent of the amount paid or incurred by the taxpayer to any person, other than the taxpayer’s employees, for qualified research.
Two Calculation Methods
Businesses are allowed to use one of two calculation methods, the Regular Credit method or the Alternative Simplified Credit (ASC) method. The Regular Credit method has a higher credit rate (20 percent) but may be more difficult to compute because the base period is tied to the 1984-1988 time period. The ASC method may be easier to compute because the base period relies on the prior three years; however, it has a lower credit rate (14 percent) than the Regular Credit method.
The PATH Act of 2015 has opened the door to even more companies qualifying for the R&D credit. For example, for tax years beginning after December 31, 2015, businesses with an average of $50 million or less of gross receipts for the prior three years can claim the credit against their Alternative Minimum Tax liability.
Startup companies also have an R&D Tax Credit opportunity. If a company did not have gross receipts for any tax year before the five-tax-year period ending with the calculation year and has annual gross receipts of less than $5 million in the current year, the R&D credit can be used to offset up to $250,000 in payroll taxes.
Finally, note that if a company is unable to utilize the credit in the current year, the R&D credit carries back one year and forward for 20 years to offset tax liability for the entity. Companies also have the availability to go back and amend prior-year returns in order to claim the credit.
Maximizing Your Opportunities
Proper understanding of the tax law can result in substantial savings. Wipfli’s dedicated team of tax professionals specializing in R&D tax law is ready to help you maximize your opportunities. We are well versed in the R&D Tax Credit. If you have questions about the tax credit or would like to talk about how your company might qualify, please contact your Wipfli relationship executive or Valerie Fedie at firstname.lastname@example.org or 715.858.6654.