Wondering if You’re Eligible for R&D Credits

If you’re a business owner who wants to eliminate the uncertainty in developing a new product or improving an existing one, you’re probably engaging in research and development. Unfortunately for them, many business owners don’t realize that in some cases, R&D expenditures may be eligible for a tax deduction. Or perhaps they think that some expenses are deductible when they’re not.

The IRS notes that “R&D expenditures generally include all expenditures incident to the development or improvement of a product.” The term “product” has a wide range in this context and can include:

  • Formula
  • Invention
  • Patent
  • Pilot Model
  • Process
  • Technique
  • Similar Property

Other examples of IRS-sanctioned R&D expenses include:

  • Obtaining a patent.
  • Attorney’s fees that help perfect a patent application.

R&D expenses you cannot deduct include:

  • Quality control testing.
  • Advertising or promotions.
  • Consumer surveys.
  • Efficiency surveys.
  • Management studies.
  • Research in connection with literary or historical or similar projects.
  • The acquisition of another’s patent, model, production or process.

You can deduct R&D expenses in one of three ways:

  • Current year deduction.
  • Amortization of deduction over a period of not less than 60 months.
  • If you choose to amortize, you can opt for the Optional Write-Off Method by deducting R&D expenses ratably over a 10-year period beginning with the tax year in which those expenses were incurred.

The IRS explains that you must charge to a capital account any R&D expenditures that you do not deduct currently, nor defer and amortize. You are allowed to claim the R&D credit against tax for certain qualified R&D expenditures, and combine the credit as one of the components of the general business credit. It also notes that the R&D credit is a nonrefundable tax credit.

Of course, rules are changing all the time, and there’s a lot of fine print. Contact us here or email a WFY advisor at info@cpa-wfy.com to see if you’re eligible for R&D credit.

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