There’s a reason why the job outlook for engineers is expected to increase by 6% over the next decade. We rely on these professionals to continually tax incentives for products, buildings, and more.
However, did you know that your engineering company can get rewarded for this type of innovation? This comes in the form of an engineering tax credit. But, what is this type of credit?
And, how do you qualify? If you want to learn the answer to this question, and more, then you’re in the right place. In this guide, we’ll teach you everything you need to know about this type of tax credit.
What’s the Best Engineering Tax Credit?
There are likely many potential tax credits that your engineering company can take advantage of. Some of these might benefit from making your place of work more energy-efficient or green.
However, when most people think of a tax credit for engineering companies they think of the Research and Development Tax Credit (or R&D). So, what is the R and D Tax Credit?
It’s an incentive that the federal government gives engineers and other companies that design or refine products. The United States government is paying you to create products that are new and improved compared to others in the marketplace.
Why are they offering this? Easy: so they can keep the United States competitive in the global marketplace. Think about it. Research and development are both expensive and risky.
It’s expensive because it typically requires high-paid staff to conduct it properly. And, it’s risky because there’s no guarantee that you’ll even discover anything.
This can make it next to impossible for some engineering firms, especially smaller ones, to engage in proper R&D.
Hence the tax incentive. Let’s take a closer look at the benefits. That way, you can decide whether or not it’s worth it for your business.
Benefits of a Research and Development Tax Credit
As you can imagine, the biggest benefit of the Research and Development Tax Credit is that it allows you to fund R&D that you wouldn’t otherwise be able to afford.
Basically, for any qualified research activities or products, the government will offer you a reimbursement of a significant percentage. This comes in the form of both cash savings and increased cash flows.
That means that if you qualify you will receive an immediate source of cash, as well as a reduction on both your federal and state tax liabilities.
Depending on the nature of your company you could save thousands or even hundreds of thousands of dollars. What’s more, many of the activities that qualify are commonplace, daily activities for many engineering businesses.
And don’t think that you need to be a huge company to qualify for it. Most small engineering businesses can take advantage of it. That leads us to the final benefit of the R&D Tax Credit: it helps you stay competitive.
In this industry, if you aren’t continually innovating, then you’re dying. So, this credit can give you the financial means to set yourself apart from the competition.
How Do You Qualify For an R&D Tax Credit?
To see whether or not you qualify, the IRS has set up a fairly simple four-part test. First, your business activity must fall under the permitted purpose. That means that you’re creating something new and improved.
This could be in the form of a new component or an old component that’s been improved in terms of quality, function, reliability, or performance. Second, the activity in question needs to be technological.
That means that it relates to either computer science, biology, chemistry, physical science, or engineering. Third, the activity needs to eliminate the uncertainty. What does that mean?
Any information discovered should eliminate any unknowns in terms in terms of product or process improvements.
Forth, the activity needs to undergo the process of experimentation to find more than one alternative. Some acceptable processes of experimentation include:
- Systematic trial and error
- Computer-aided modeling
- Prototype creation and testing
- Simulations
All of these methods help identify potential alternatives that could help in development.
R&D Tax Credit Study
Unlike some other types of tax credits, the IRS requires a significant amount of documentation. So, to maximize your chances of qualifying it’s recommended that you hire professionals that specialize in these types of tax credits.
These professionals will perform what’s known as an R&D tax credit study. This is a dive into your company’s product development, engineering, and manufacturing information.
All of these areas need to be significantly documented if you want to get any claim on your taxes. Just make sure that you can trust the company you hire.
There are potential trade secrets that you don’t want to be leaked to other businesses. So, you should be sure that there’s no risk of them doing this.
R&D Tax Credit Misconceptions
There are a lot of misconceptions surrounding the R&D Tax Credit. Many companies worry that if their product fails, then they won’t qualify. But, this isn’t true. Failure is an important part of R&D.
As long as the activity qualifies, then it doesn’t matter if it was a success or failure. You should also apply even if your company doesn’t have a huge tax liability federally.
Remember that you can apply for the credit against your payroll tax, not just profits. This is extremely helpful for small businesses and startups.
Engineering Tax Credit Details and More
We hope this article helped you learn more about the engineering tax credit. In this day and age, if you’re company isn’t innovating, then you’re declining.
So, why not take the incentive to innovate? Hire a firm to begin your R&D tax credit study now. Did you enjoy this article? We have hundreds more just like it so keep reading to find them.Â
