Claiming the R&D tax credit can potentially help your business offset increased cash flow. However, simply completing IRS Form 6765, Credit For Increasing Research Activities, doesn’t guarantee the IRS will approve your claim.
Learn a few key things you can do to ensure your R&D tax credit is defensible in the case of an IRS or state audit.
1. Understand Which Activities are Considered Qualified Research Activities
One of the most important things you can do to make your R&D tax credit defensible is understand what qualifies as research activities. Qualified research activities are specific efforts to develop new products, fabrication processes, or software, or improve existing ones. This can include activities such as developing firmware and risk management systems, designing tools and fixtures, automating manufacturing processes, and much more.
To determine if your research activities are eligible under the R&D tax credit claim, you’ll need to ensure each passes the Four-Part Test as outlined in IRC §41(d). Any company that wants to claim the R&D tax credit must satisfy each of the criteria of the Four-Part Test, including the Business Component Test, Technological Uncertainty Test, Process-of-Experimentation Test, and Technological-in-Nature Test. Learn more about the Four-Part Test here.
2. Make Sure You Meet the Additional Qualifications
In order for a taxpayer to claim the R&D tax credit, there are a few minimum qualifications that must be met in addition to the above-mentioned qualified research activities. These additional requirements include having 5 years or less in revenue and having less than $5 million in revenue in the current year. It’s important to note that qualifications can vary by state, so you’ll need to understand these specific qualifying factors within your state when claiming the tax credit.
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