R&D Tax Credit Software: Things to Know About R&D Credits


How do you know if your R&D tax credit software make sense for your business? This article will discuss all the things you need to know about R&D tax credits and how it can make sense for your business. If you’re a business owner interested in filing for R&D tax credits, read on to find out more.

Growing a business involves the development of new products, techniques, technologies, systems, and in some cases, even industries. Development is essential to the success not only of your company, but also to the overall economy. The economy, after all, needs innovation to continue growing.

But innovation often requires costly research and development (R&D). In most cases, promoting such changes end up in failure, with no return on investment (ROI), or sometimes require multiple stages of development before it becomes profitable. The costs involved in research and development can be discouraging for businesses. Fortunately, the R&D tax was created. With it, businesses were given an incentive to continue their efforts in innovation.

What is the R&D tax credit software program?

The Research and Experimentation Tax Credit, also known as the research and development (R&D) tax credit, or R&D credits, is part of the U.S. tax code which promotes economic growth by encouraging companies to invest in research, experimentation, innovation, and new technologies.

The R&D tax credit was first introduced in 1981 and was regularly renewed in the decades that followed. It was in 2015, when President Barack Obama signed the PATH Act, permanently extending the R&D tax credit, as well as expanding some of its provisions. Since 2016, the R&D tax credit has been used to offset the alternative minimum tax (AMT), and startup businesses could use it against payroll taxes. The Tax Cuts and Jobs Act (TCJA) made additional changes to the tax credit that was imposed on 2022. 

A tax credit makes it possible for the taxpayer, which can be a company, to counteract the cost of the credit against their business’ tax liability. The R&D tax credit, according to the IRS, is for “expenses paid or incurred for qualified research”.

Benefits of R&D tax credit software

Granting tax credits for businesses, especially when it’s to encourage research and development is generally thought to help the economy. How? When you increase innovation, you also help the economy. But some business groups claim that these benefits may be useless with the new amortization rules in the TCJA. At the start of 2022, the TCJA requires businesses to amortize their US-based R&D costs over five years, instead of deducting them immediately. 

However, businesses that currently claim the R&D credit benefit from having less tax liability. This makes it a cash-source for a lot of small and mid-size businesses. The R&D credit helps businesses by:

  • Reducing federal and state tax liabilities for the current year and future years
  • Increasing the company’s market value and cash flow
  • Lowering a business’ effective tax rate
  • Lets you keep more of your profits

How Do You Know if You Qualify for the R&D Tax Credit?

The IRS changed the language used to determine which companies can claim tax credits for R&D. Now, almost any company that conducts research and development, tests products, engage in data science and data analysis, employ engineers, or outsource product research can claim R&D credits.

But in order for your business to claim the credit, it must show an element of hard science in its research to claim the credit. For instance, if you own a restaurant or work as an accountant, you cannot claim the credit even if you conduct research or test out new products. A business in the field of ‘humanities’ or ‘arts’ or ‘social sciences’ that tries to claim R&D credits are highly likely to be audited by the IRS.

Remember, regardless of the business you own or run, if you want to qualify for R&D tax credits, keep proper documentation as proof that your expenses qualify.

What Documents do You Need to Claim R&D Tax Credit Software?

There is no specification by the IRS on what ‘sufficient documentation’ is needed to claim a tax credit for R&D is. But the burden of proof lies with the taxpayer, meaning your business should keep as much documentation related to your R&D activities as possible in case an audit is required. Below are just some of the documents you should keep on hand for your R&D tax credit software:

  • Payroll information for employees personally involved in R&D and for employees or managers that are in charge of them.
  • General ledger reports categorizing which business expenses and supplies were done in the name of R&D and those that weren’t 
  • Copies of contracts and invoices addressed to contractors who conduct third-party research for you
  • Timekeeping records for meetings, payroll, work plans and other activities to prove they were relevant to R&D activities
  • Test records, blueprints, design drawings, progress reports, marketing materials and any other documents that demonstrate the process and impact of your research.

Can You Increase Your Business’ Tax Credits?

Small businesses can take advantage of the R&D tax credit in more ways than one. Small businesses that qualify for the tax incentive can claim tax credit for research expenses that increase over time. In order to claim this credit, you must have proof that your expenses have grown from your previous year in business.

If your qualified small business doesn’t have income tax liability, you can use the R&D Tax credits software to counterbalance the FICA part of payroll taxes of up to $250,000. Small businesses that qualify for R&D tax credits are those with annual gross receipts under $5 million with gross receipts for not over than five years. With this, you’re able to claim tax credits for your small business’ research expenses even if you aren’t generating revenue yet.

Qualifying for the R&D tax credit

The rules for the R&D tax credit applies to any taxpayer that incurs R&D-related expenses (qualified) on U.S. territory.

In order to qualify you must prove that your R&D activities satisfy the following criteria:

  • For discovering naturally technological information
  • For developing new or improved business elements
  • They are based on hard science, such as physics, engineering, biology, or computer science
  • They attempt to eliminate uncertainty
  • They use scientific experimentation
  • They are innovative
  • They are not commercially available
  • They use economic risk to develop
  • They lead to significant reduction in cost or improvement in speed