R&D Credit

Recent updates to R&D credit:

On Aug. 16, 2022, the Inflation Reduction Act, had tax credits intended to encourage investment in domestic energy and innovation. The Inflation Reduction Act increased the maximum amount that a qualified small business (QSB) can use from the Sec. 41 research credit (R&D credit) to offset certain payroll tax liabilities from $250,000 to $500,000 for tax years beginning after Dec. 31, 2022.

• It also enable payroll tax offset against the 6.2% employer portion of the Social Security payroll tax liability.

• The Inflation Reduction Act now also enables taxpayers to use up to $250,000 against the 1.45% employer portion of the Medicare payroll tax liability.

The R&D credit guidelines:

• To develop a new or improved business component (i.e., product, process, computer software, technique, formula, or invention) there must be uncertainty related to the capability or methodology for developing the business component or the design of the business component itself, and substantially all the research must constitute elements of a process of experimentation.

• Specific activities are excluded from the definition of qualified research, including research performed outside the United States or research funded by another entity. Examples of certain activities that may exclude a project from qualification :

  1. Research after commercial production;

  2. Adaptation of existing business components;

  3. Duplication of an existing business component;

  4. Surveys and studies;

  5. Funded research;

  6. Research conducted outside the U.S.;

  7. Reverse engineering of a product; and

  8. Research based on the social sciences, arts, or humanities.

• Eligible qualified research expenditures include taxable wages, supplies, computer lease or rental costs (including cloud computing), and third-party contractor costs. Taxpayers may also include costs for individuals directly supporting or directly supervising the performance of qualified research.

• R&D credit is a nonrefundable general business credit, which is carried back one tax year and carried forward 20 tax years.

For more information on R&D credit for your company please connect with contact@2cherrytax.com