What Kind of Research is Worthy of the R&D Tax Credit?

What Kind of Research is Worthy of the R&D Tax Credit?
An incentive for businesses to invest in science and technology can't be applied to market research (Photograph by Gallery Stock)
Photograph by Gallery Stock

Question: I’m an independent real estate sales person, and I do my own research and comparative market analysis for new property listings. Would someone like me stand a chance at qualifying for an R&D tax credit?

Answer: While the market research you do is vital to your business, your activities fall outside the scope of the R&D tax credit, says Farrell Gerbode, who manages the R&D tax credit practice for small and mid-sized business clients of Los Angeles consultancy Tax Credit Co. “When Congress enacted the R&D credit, its intent was to reward research activities it considered to be technological in nature,” Gerbode says. “Generally speaking, this includes research on topics related to the physical sciences, engineering disciplines or software development fields.”

The law explicitly excludes research like yours, which is related to marketing, business management or routine data collection and testing. The kind of research that qualifies for the tax credit must be done in the course of developing a new or improved product or business process.

When it was enacted in 1981 as part of an economic stimulus package, the tax credit was intended to encourage investment in the U.S. Ever since then, large corporations have made up the bulk of those claiming the credit. Many small businesses, particularly engineering and technology companies, could claim the credit but don’t, either because they don’t know about it or they’re concerned that it might trigger an IRS audit. Even startups with no income may claim the credit for qualified research and experimentation costs incurred in their early years and carry them forward to offset taxes on future profits.

Sean Haggard, a CPA and tax manager in the Miami office of Kaufman, Rossin & Co., explains that hard science and experimentation are keys to qualifying for the credit. “The product or service must be technological in nature and based upon a hard science. And there must be a process of experimentation, where there is uncertainty and more than one alternative available by which the individual must test to determine the best alternative,” he writes in an email.

The R&D credit lapses at the end of this calendar year and is no longer available to taxpayers as of Jan. 1, 2014. However, it draws bipartisan support and has been continuously renewed since its original expiration date in 1985. President Obama has proposed making the credit more effective by establishing it as a permanent part of the tax code, but his proposal has not gained traction in Congress.

Haggard says he expects the credit to be retroactively reinstated sometime after the beginning of 2014. “Both parties agree it should be extended but it is buried in the quagmire of Washington at this time,” he writes. “As it was in late 2012, when the credit was retroactively reinstated to the beginning of the year, we currently anticipate the same treatment for 2014. Unfortunately, it will be held hostage until mid- or late-2014 before it is extended.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE