How To Claim The Research & Development Credit On Your Taxes

If your business engaged in research and development to improve or create a product or process, you may qualify for the research and development tax credit, a money-saving tax benefit that lowers your federal income tax liability.

But, like most business owners, you may be unsure how to claim the R&D tax credit on your taxes. We’re here to help!

In this post, we will explain everything you need to know about claiming the research and development tax credit. From important documentation to have on hand to the proper tax forms to file, we cover it all.

Keep reading to learn more about how to claim the R&D credit on your tax return.

What Is The R&D Tax Credit? The Quick Answer

The research and development (R&D) tax credit is a federal credit available to eligible businesses that participate in qualified research and development activities. This tax credit is used to lower income tax liability, and in some cases, can be used to offset Alternative Minimum Tax or the employer’s share of payroll taxes.

How To Claim The R&D Credit On Your Taxes

The R&D tax credit is claimed on your income tax return. The following five steps outline how to claim the credit on your current year’s tax return.

Step 1: Determine Your Eligibility For The R&D Tax Credit

The first step to claiming the R&D tax credit is to determine if you’re eligible to receive the credit. Your business must conduct research and development activities to create or improve a product or process. Additionally, these activities must meet the four-part test outlined by the IRS. The requirements are:

• Permitted purpose
• Eliminating uncertainty
• Technological in nature
• Process of experimentation

The requirements for claiming the R&D credit are complex, so make sure to review IRS guidelines and consult with an accountant or tax pro if you have any questions regarding your eligibility.

Step 2: Gather Your Documentation For R&D Expenses

Before claiming the R&D credit, you’ll need to gather your documentation and records to calculate the amount of your credit. The IRS requires every business that claims the R&D credit to keep records to prove that all expenses qualify for the credit and meet the requirements set forth in Section 41 of the Internal Revenue Code.

If your business has purchased supplies for research and development that meet the requirements for the R&D tax credit, your records may include:

• Invoices
• Receipts
• Purchase orders
• Accounting records such as the general ledger and chart of accounts

If your business has qualified employee expenses, your records may include:

• Payroll records
• W-2s
• Employee timesheets
• Meeting minutes

If your business has contracted expenses, your records may include:

• Invoices
• Purchase orders
• 1099s for contractors used
• Service contracts
• Accounting records

Step 3: Determine Which Method You’ll Use To Calculate R&D Expenses

There are two methods for calculating the R&D tax credit: the Regular Credit method or the Alternative Simplified Credit (ASC) method. The IRS recommends that businesses claiming the R&D tax credit calculate the credit using both methods to determine which is best.

Calculating The Regular R&D Tax Credit

To calculate the Regular Credit, start by using IRS Form 6765, Credit for Increasing Research Activities. For the Regular Credit, you will complete Section A of the form. Using your records, you will add the following to the form:

• The amount paid or incurred to energy consortia
• Basic research payments to qualified organizations
• Qualified organization base period amount
• Wages for qualified services
• Supply costs
• Rental or lease costs of computers
• Contract research expenses
• Fixed-base percentage
• Annual gross receipts

With this information, you can walk through each step of Section A of Form 6765 to calculate your R&D credit.

Calculating The Alternative Simplified Credit

If you opt to use the ASC Method or you’re using both calculations to compare which yields the higher tax credit, skip Section A and move on to Section B of Form 6765.

In Section B, you’ll need the following information:

• The amount paid or incurred to energy consortia
• Basic research payments to qualified organizations
• Qualified organization base period amount
• Wages for qualified services
• Supply costs
• Rental or lease costs of computers
• Contract research expenses
• Total qualified research expenses for the prior three tax years

While this information is very similar to the figures needed for the Regular Credit calculation, there are some notable differences. Specifically, you will not need to enter your annual gross receipts, and you also aren’t required to calculate the fixed-base percentage.

Once you have all of your information, work through Section B to calculate the amount of your R&D credit.

Step 4: Complete Form 6765

Once you’ve determined which method you’ll use to calculate your R&D credit, you will need to complete Form 6765. This includes adding your name at the top, completing section A or B, and filling out section C for the current year credit. If you are opting for the payroll tax election, you will also complete section D. We’ll go into more detail about filling out section D later in this post.

Step 5: Submit Tax Forms & Documentation To The IRS

Once Form 6765 is complete, attach it to your completed income tax return and submit to the IRS. Make sure to submit your tax forms by the IRS deadline of April 15 (or the following business day if April 15 falls on a holiday or weekend) to avoid being hit with penalties and interest.

How To Claim The R&D Credit To Offset Alternative Minimum Tax

To use the R&D credit to offset Alternative Minimum Tax (AMT), businesses must have engaged in qualified R&D activities and must meet these additional requirements:

• Be a partnership, sole proprietorship, or corporation whose stock isn’t publicly traded
• Average annual gross receipts for the 3-tax-year period preceding the tax year of the credit must be $50 million or less

Another thing to note is that taxpayers with a tax liability of more than $25,000 can’t offset more than 75% of their liability using the tax credit.

How To Apply The R&D Credit Against Payroll Tax

Certain businesses may be able to apply all or a portion of the R&D tax credit against the employer portion of Social Security taxes. Businesses that claim the payroll tax election must be a corporation or partnership that meets these requirements:

• Gross receipts of less than $5 million for the current tax year
• No gross receipts for any tax year before the 5-tax-year period ending with the current tax year

Businesses may use up to $250,000 of their R&D tax credits to offset payroll tax, with a lifetime maximum of $1.25 million. Eligible taxpayers can claim the R&D credit against payroll tax by taking the following steps.

 Step 1: Fill Out & File Form 6765

Eligible businesses will fill out Form 6765 as they would typically do when claiming the R&D tax credit. This includes filling out section A or section B in addition to section C. The primary difference is that section D will also need to be completed. For this section, you will need:

• The amount elected to the payroll tax credit, is not to exceed $250,000
• General business credit carryforward from the current year

After completing Form 6765, attach it to your income tax return and submit it to the IRS by the deadline.

Step 2: File Form 8974 With Employment Tax Returns

Once you’ve elected to use your R&D credit for your payroll taxes by filing Form 6765, you’ll need to complete and file Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities.

You will need information from your tax return, including:

• Ending date of income tax period
• Date your income tax return was filed
• EIN used on Form 6765
• Amount allocated to your EIN
• Amount of credit taken on a previous period

Using the above information and the information from Form 941, 943, or 944 for your quarterly tax return, calculate the credit you’ll be able to use for the tax period you’re currently filing for.

Once complete, you’ll file Form 8974 with your employment tax return. Make sure to submit your forms by the IRS deadline to prevent paying penalties and interest.

How To Claim The R&D Tax Credit For Prior Tax Years

If you failed the claim the R&D tax credit in previous years, you may still be able to claim these credits. You can do this by filing amended tax returns for the years in which you were eligible to receive the credit.

It is important to note that in most cases, you will only be able to file amended returns for the previous three years. There are some possible exceptions for businesses that experienced losses.

In addition to filing an amended return, you must also provide five items of information to the IRS to validate your claim. This information includes:

• All business components related to the research credit being claimed
• All research activities performed for each business component
• Names of the individuals that performed each research activity
• The information that each individual sought to discover for each business component
• Total qualified employee wage expenses, supply expenses, and contract research expenses paid or incurred for the claim

All information should be included and filed with your amended return.

When To Hire A Professional To Claim The R&D Tax Credit

As you can see, claiming the R&D credit is an extremely complex process. Many business owners opt to lean on a professional when it comes to claiming this tax credit. You should consider hiring one of the best R&D tax experts to claim your credit if:

• You’re unsure if your R&D activities meet the requirements set by the IRS
• You don’t have time to file extra tax forms
• You don’t understand the requirements and steps for filing for the R&D credit
• You want to use your tax credits to offset payroll taxes or AMT taxes but aren’t sure how
• You need help getting your records in order to calculate and file for the credit
• You have a particularly complex tax situation

Of course, these aren’t the only reasons to hire an expert to claim your R&D credit. A good general rule of thumb is if you have questions or don’t understand tax laws, it’s best to at least seek out a professional for advice.

If you choose to hire a pro to claim your tax credit, you can turn to an attorney, a tax professional, or other firms that specialize in helping business owners find tax credits and other money-saving benefits. While these services do come at a cost, that cost may be very minimal compared to the potential tax credits you receive, as well as the penalties and interest you can avoid by filing your taxes correctly.

The Bottom Line On Claiming The Research & Development Credit On Your Taxes

Not every business will qualify for the R&D tax credit, but those that do will find that reducing their tax liabilities is well worth the time and effort it takes to claim the credit. Do your research on the credit, gather your records, and don’t be afraid to reach out to a professional if need guidance along the way.

Don’t qualify for the R&D tax credit? Don’t worry — there are other ways to put money back in your pocket. You may qualify for the Work Opportunity Tax Credit, which gives as much as $9,600 per eligible employee. For other money-saving tax opportunities, check out our other content or consult with your attorney or tax professional.