Figuring out qualifying costs for R&D tax credit claims can be challenging. Determining what constitutes qualified research expenses (QREs) is an essential aspect of the claim process, and we discuss which small business expenses qualify for an R&D tax credit claim.
What Defines Qualifying Costs?
Qualifying costs are research and development expenses that include employee wages and salaries, supply costs, and contract research expenses. However, administrative and general business operating expenses are unlikely to qualify as QREs.
Employee Wages and Salaries
Businesses must report all wages and salaries from all employees involved in R&D. Employees do not need to have a job title commonly associated with R&D for their efforts to qualify. For example, if a supervisor with a different job function conducts R&D, their actions are likely to be a qualifying research activity.
Organizations must prove that their employees are conducting research and development. To maximize the chances of receiving R&D tax credits, a small business should keep track of all R&D activity within the organization. This involves businesses keeping track of timesheets and payroll records and logging all R&D activities to solidify your company’s tax credit claim.
The other component of a successful R&D tax credit claim is reporting supply expenses. Supply expenses must directly relate to research and development activity. For example, if a company performs laboratory work, lab supplies such as test tubes, formulas, blueprints, and equipment would be QREs. However, rental or mortgage costs and office supplies not directly related to research and development would not count as QREs.
Contract Research Expenses
Similarly to employee wages and salaries, contract research expenses are eligible to be part of an R&D tax credit claim. The difference between contract and employee-performed research expenses is that a third party performs contract research and development on behalf of a business. Third parties include 1099 contractors, US-based contract firms, or any other party not employed directly by the organization.
Companies can claim up to 65% of contract research expenses in their R&D tax credit claim. For instance, if a third party performs $10,000 of research on behalf of the taxpayer, the taxpayer can claim $6,500 of research expenses for their claim.
Gathering all qualifying research expense documents can be difficult for time-strapped small businesses. MainStreet can help your organization claim all eligible R&D tax credits and save you time and money to invest in your business. Contact us today.