Doing research and development, or R&D, is a big part of business operations. In order to stay ahead of the market and continue delivering the best solutions to customers, you have to invest in research and development projects. The government understands this as much as businesses do, which is why there are R&D tax credits, research grants, and other stimulus packages.
These stimulus packages are put in place for the purpose of promoting innovations. That said, they are very similar to other tax credits you can claim. This means you still have to calculate how much you can file in R&D tax credits. Just with other tax breaks and stimulus packages, the big question is: should you file R&D tax credits yourself?
Common Mistakes to Avoid
Before we get to how you can calculate your R&D tax credits and file for a reduction properly, we need to first take a closer look at some of the common mistakes associated with R&D tax credits, beginning with not making an R&D tax credit claim in the first place.
You can save a lot on your R&D costs – and operational costs in general – by filing for an R&D tax credit, so not taking the time to claim the credit is not something you want to do. More importantly, the tax credit is available to almost all advances in technology, which may cover your R&D projects.
The tricky part is recognising the R&D projects and activities (and costs) that you can add to your tax credit filing. This is where more common mistakes related to R&D tax credits can be found: not claiming all costs and not including all activities that are considered eligible for the tax credits.
Cost elements are easier to identify. Any cost related to your R&D program can be claimed against the R&D tax credits, including the salaries of your R&D employees and expenses associated with rewarding them. You can also claim consumables, energy bills, and everyday expenses as qualifying costs.
As for activities, any research and development project involving advanced technology can be classified as eligible for R&D tax credits. Whether you are researching new technologies, reviewing existing ones for the purpose of improving them, or developing new solutions for internal and external use, you are running an R&D project that qualifies.
Now that you know some of the common mistakes to avoid, filing for R&D tax credits is certainly easier. You have to be certain that you file for one if you run any type of R&D project within the business, and that you include all costs and activities that qualify to earn the maximum tax credits.
Calculating Your Tax Credits
The real challenge comes when it is time to calculate the amount you can claim. The regulations governing R&D tax credits are actually very straightforward and you already have a better idea of what to calculate based on the mistakes you need to avoid.
There are eight primary costs that you can add to your R&D tax credit filing, including direct staff costs, consumables, software, trials and trial volunteers, and prototyping. You can read GrantTree’s complete list of these costs to learn more about what you can (and cannot) include in your tax filing.
There are detailed explanations on how to calculate each cost element too. For example, depending on how much time an employee spends doing R&D, you can claim portions of that employee’s salary and other rewards as a tax credit.
The same can be said for external workers. You can claim fees and other rewards given to freelancers or contractors as long as they are directly involved in your R&D project. The same percentage amount (based on time spend on R&D) is also used to calculate the exact amount you can claim.
If you buy licenses for software critical to the R&D project, or you have volunteers running trials, the costs associated with these activities can be calculated towards the R&D tax credit too. For larger corporations, there is an option to include grants and contributions given to independent research groups as tax credits.
These cost elements may seem complicated at first, but they are very easy to calculate. As long as you document everything about your research project – including activities related to that project – you should be able to identify key details and calculate how much you can claim in R&D tax credits.
Last but certainly not least, you have the option to get the assistance of tax experts – particularly those specialising in R&D tax credits and innovation grants – to help get your R&D tax credit in order. Remember that the R&D tax credit is an important tax break for businesses – you can claim a substantial portion of your R&D costs back and fuel future innovations. There is no such thing as being too careful when calculating and filing the claim.
Working with specialists allows you to dig deep into the tax code and understand the maximum amount you can claim every time. Rather than wasting money and making unnecessary mistakes, you can sit back and relax while an R&D tax credit specialist walks you through every step of the process.
Experts will also make sure that your claim is successful. They will pay attention to the necessary details, prepare the essential filing and supporting documents, and guide you through the process correctly. Even better, some of the best R&D tax credit specialists work for a relatively small fee, so there is really no reason not to work with them. The amount you save in return makes hiring the R&D tax credit specialist well worth every penny.
Read the Rules
Claiming R&D tax credits is a must, especially if you regularly fun research projects and work in advancing technology. While the tax code itself is easy to understand, taking some time to read it is still highly recommended. Combined with the other tips and tricks we covered in this article, filing R&D tax credits is no longer a difficult challenge to overcome. You know the mistakes to avoid, the costs to add to your filing, and the right specialists to work with every step of the way.