How to Make Your R&D Tax Credit Defensible

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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Small Tax Firms Increase Annual Revenue

Good News For Small And Medium Size Tax Firms!

Small and medium sized tax firms nationally are benefitting from new revenue streams by offering R&D tax credit and cost segregation services to their clients. Many firms are growing by offering more diversification in services offered to their client base, thereby deepening long-term client relationships.

Any time your tax services firm can differentiate itself by offering a specialty niche, you have the opportunity to stand out from your competition while providing extra value to clients. Many firms are outsourcing R&D tax credit and cost segregation services to tax services firms, both of which can generate a fresh stream of revenue with little or no capital investment. Your firm should identify current clients that will benefit from R&D tax credit or cost segregation services. Legislative changes make cost segregation and R&D tax credits even more valuable to your clients. The reality is, if you aren’t already offering these services, other firms will.

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