In today's competitive business landscape, innovation plays a vital role in driving growth and staying ahead of the competition. To incentivize research and development (R&D) activities, governments around the world, including the United States, offer tax credits to eligible businesses. The R&D tax credit is a valuable opportunity for companies to recoup a portion of their R&D expenditures, thereby encouraging continued investment in innovation. However, it's important to understand the rules and requirements associated with claiming this credit. In particular, the 80% rule is a crucial aspect that businesses must grasp to maximize their R&D tax credit claims.
The 80% rule is a critical provision that determines the eligibility of R&D activities for tax credits. Under this rule, to qualify for the R&D tax credit, a company's research activities must be intended to discover information that is technological in nature and be aimed at developing or improving a product, process, technique, formula, or software.
Furthermore, the research activities must satisfy the "substantially all" requirement, which implies that at least 80% of the total research costs must be attributable to activities that fall within the scope of the R&D tax credit. This means that a company cannot claim the credit for incidental or non-qualifying activities that are not directly tied to the development of new or improved products or processes.
To maximize your R&D tax credit claims while adhering to the 80% rule, our team of experts here at Velo Advisers encourages:
a. Detailed Documentation: Maintain comprehensive records of your R&D activities, including project descriptions, technical specifications, experimentation details, and supporting evidence, and details on employees' time and functions within R&D activities. This documentation will serve as evidence when claiming the credit and ensure compliance with the 80% rule.
b. Accurate Cost Allocation: Properly allocate costs associated with R&D activities, ensuring that at least 80% of the expenditures are directly attributable to qualifying research. It's essential to track and document costs meticulously to substantiate your claims.
c. Seek Professional Assistance: Engage the services of an experienced tax advisor or R&D tax credit specialist, like those at Velo Advisers. They possess the necessary expertise to identify eligible activities, accurately calculate the credit, and provide guidance on complying with the 80% rule. Their expertise will ensure that you maximize your R&D tax credit claims effectively.
d. Continuous Improvement: Embrace a culture of continuous improvement within your organization. Regularly assess your R&D processes, identify areas for enhancement, and implement measures to increase the percentage of qualifying activities. This proactive approach will not only improve your eligibility for the credit but also drive innovation throughout your business.
Schedule a call today with our team of experts to better understand the 80% rule and ways your business may benefit from the R&D Tax Credit!