Every year, many companies dedicate time, resources, and effort to developing new technologies to better their businesses. Depending on the company, the resources put into these projects can carry extra weight for a company. Fortunately, there are ways your company or business can receive a credit from the IRS (Internal Revenue Service) and recover the expenses you engaged in during your product’s research and development. Our Roseville accounting professionals for LLCs from Cook CPA Group invite you to keep reading as we discuss what qualified research and development expenses are in California.
Understanding Qualified Research & Development Expenses in CA?
Qualified research and development expenses are part of the costs of a company’s creation of an innovative product. The IRS is in charge of determining the costs that qualify as research and development. IRC § 41, (b)(1) defines qualified research expenses or “QREs” as the sum of a company’s or business’s in-house and contract research expenses. The definition provided by the IRS statute encompasses a wide range of costs that go into developing a new product or technology. As you may know, research and development are the most essential aspects of product creation and it’s also where most companies burn more cash.
According to IRC § 41(b)(2), in-house research refers to wages paid to an employee for qualified services, money paid for supplies used to conduct research, and any amount paid to a qualified person for the use of computers to conduct qualified research. Qualified businesses may get a credit on their expenses destined to research and development awarded by the IRS. However, it is essential to understand that the IRS is very specific in terms of the expenses that may constitute “qualified research” and can be compensated. It is essential to hire an experienced, skilled Roseville tax accountant or consultant who can help you deal with these critical matters. Our California team of tax consultants can help you with this matter.
What is a Qualified Research Activity?
As we mentioned, the IRS controls the actions that may or may not qualify as research activity. However, the IRS determination on this subject is not something that is arbitrarily decided. Instead, the IRS follows a four-step process to determine whether a particular business entity qualifies for the tax incentives provided to help cover research and development. Any company looking to take advantage of the benefits provided by the IRS must meet and satisfy each of the following criteria:
In order to take advantage of the IRS’s tax incentives for qualified research and development expenses, your company’s goal must be directed towards improving your business. The IRS makes no distinction on the type of improvement, whether it is the creation of a new product, software, service, or any other improvement that may benefit your business. The IRS requires the purpose of your project to be a “new and improved business component of the taxpayer.”
Elimination of Uncertainty
Your project must be transparent and dissipate any sign of ambiguity in terms of its purpose. In other words, your business project must go beyond mere cosmetic changes or “tweaks.” The changes you may expect from your R&D should be supported with information showing any proposed changes that can be implemented in your business.
Suppose you are going through research and development to create better e-mail communication in your company. While this may help increase in-house communication, it may not be enough to meet the IRS criteria. Compare this to the development of a new product to increase production, shipping, and post-delivery analysis. This may serve as a way to justify the assistance of the IRS.
Your company must have explored different ways to develop your innovation. This means you can prove you conducted trials, improved on foreseeable errors, and refined your innovation through trial and error. You should be able to provide the IRS with all the information that helped you throughout your innovation process. This is an essential step in the four-part process because it enables you to paint a clear picture of your innovation to the IRS.
Hard science is a critical element in this particular step. The IRS does not rely on conjectures, what’s, or if’s. Instead, they rely on hard facts that can help the IRS understand that you relied on scientific principles to conduct adequate research and development.
What can Research and Development Expenses be Claimed to the IRS?
As a company engaging in research and development expenses, you may wonder what you can claim from the IRS after creating your innovation. The IRS statute IRC § 41(b)(1) gives you a general idea of what may be recoverable. Accordingly, you may claim in-house research expenses used in the development of your innovation. This includes wages, money paid on supplies and qualified services, and other expenses used in-house to create your innovation.
Additionally, you may recover contract research expenses through a tax credit. However, the IRS may conduct several tests to determine whether you can qualify to get credits for this particular expense. One of the most important things to consider is when you should strive to make your request with the IRS. One of the best ways to guarantee all of your research and development expenses is to consider presenting your report during your first research and development year. This can help you make sure the IRS considers your innovation’s research and development from the beginning. Our Sacramento federal corporate tax preparation accountants can help you with this and other tax-related matters.
California Tax Accountants Handling Qualified Research and Development Expense Cases
If you are looking for assistance with your business financial statement, audit, or tax return in California, we can help. Our Roseville and Sacramento accounting firm can help you handle the intricacies and challenges associated with your business tax and financial matters. For many years, Cook CPA Group has dealt with countless cases and has assisted thousands of satisfied customers. To learn more about our services, call our offices today (916) 259-5496.