R&D Credit Contract Research Expenses: Understanding How to Maximize Benefits

The Research and Development (R&D) tax credit is an incentive provided by the government to encourage innovation and research activities within organizations. It was introduced in the 1980s and has since been revised and renewed numerous times.

One of the significant expenses that can qualify for R&D tax credits is Contract Research Expenses (CRES). CRES encompasses payments made to third parties, such as universities or research institutions, for conducting research on behalf of the company. These expenses are often overlooked, but they can prove to be a valuable tax credit for companies engaged in R&D activities.

To qualify for R&D tax credits, the research conducted by the third-party must satisfy the IRS’ definition of “qualified research.” This means that the research must be conducted to create a new product, process, or formula that is intended to be used in the company`s business. The research must also involve a process of experimentation aimed at resolving a technological uncertainty.

While CRES can be a valuable source of R&D tax credits, organizations need to meet certain criteria to claim them. Firstly, the organization must be engaged in qualified research activities as per the IRS definition. Secondly, the payments made to the third-party for research cannot be for the purchase of goods or services that result in the delivery of tangible personal property.

For instance, if a company enters into a contract with a university to develop new software, the expenses incurred in the research would qualify for the R&D tax credit. However, if the company purchases a software package that is already available in the market, the expenses would not qualify for the credit.

Furthermore, companies can only claim R&D tax credits for CRES payments made to third parties based in the United States. Payments made to foreign research institutions do not qualify for the credit.

To maximize the benefits of the R&D tax credit, organizations should keep detailed records of expenditures and document the research activities conducted by the third-party. These records should include the nature of the research, the parties involved, and the expenses incurred. This documentation will help provide evidence to support the R&D tax credit claim in case of an audit by the IRS.

In conclusion, Contract Research Expenses can be a valuable source of R&D tax credit for organizations engaged in qualified research activities. However, the payments made to third-party research institutions must meet certain criteria to qualify for the credit. Organizations should keep detailed records of the research activities and expenses incurred to support their R&D tax credit claims. By doing so, organizations can maximize the benefits they receive from the R&D tax credit program.