What to Expect when Settling a Claim for R&D Tax Incentives in Ohio

The United States has long been known for its somewhat rigid rules when it comes to corporate taxes. Companies usually have to resign themselves to a high rate of corporate income tax. But recent developments have shown the US government’s aim to move forward – and earn points with various firms and corporations, big and small.

The proposal put forward by the US Treasury department involves research and development tax incentives, which aim to clarify the rules for the program and therefore make them more ‘attainable’ for more firms. Some tax lawyers and specialists have already lauded these proposals, stating that they can allow more companies to save millions in their taxes, as there are undoubtedly less rigid restrictions on R&D tax credits.

The four-part R&D tax incentive test

In order for any firm to qualify for the R&D tax credit, they need to determine their eligibility by making sure that they adhere to the four set elements. These include:

  • The research’s purpose should be to either improve a current functionality or improve an existing product so that a technological and social gain can be attained.
  • The research project or program should follow a certain, systematized process and procedure, where several different alternatives for other developmental projects are assessed and screened.
  • The firm or taxpayer should have the goal of eliminating any uncertainty related to the specific research and development program.
  • The research project must be related to engineering, physical science, computer science, or the biological sector.

Apart from these four conditions, there are a host of restrictions which include software which has been developed for the company’s own internal use, reverse engineering, or other research activities that are related only to the social sciences.

A look at Ohio’s R&D tax incentives

Ohio is known for its Ohio Research and Development Investment Tax Credit, which is basically a non-refundable credit from the CAT, or Commercial Activity Tax in the state. Firms which are interested in qualifying for this incentive are supposed to invest in qualified research expenses, according to Sec.41 of the IRC. This would also include expenses incurred in-house, such as supplies, employee salaries, and contract expenses. This Ohio R&D tax credit is equal to 7% of the total amount of qualified expenses on research in excess of the firm’s average investment in R&D over the three previous years. If there is any excess credit that has not been used for the year when it is earned, it is possible to have it carried over for a period of 7 years.

Ohio also has its Research and Development Sales Tax Exemption, which exempts any enterprise from their whole state and county sales tax when they purchase qualified equipment and machinery that will be primarily used for R&D.

If you are a firm based in Ohio and would like to know more about your privileges for the R&D tax incentive in the state, contact our experts here at Swanson Reed.

Claiming Research and Development Tax Credits for Your Ohio-Based Company

If you’re looking for an immediate cash flow for your company, you should investigate the opportunity that you may have overlooked when you filed your corporate tax returns in the past. Whether your Ohio-based company is small or medium-sized, you may qualify for research and development tax credits that can provide you with the cash that you need to expand your company or secure its financial stability.     Many companies self-eliminate their claims by assuming that they aren’t big enough or the return won’t be significant enough to make a difference in their claim. Knowing that you can recover 6.5 cents for every dollar that you spend on research and development activities may be the incentive that you need to partner with a team of professionals that can find tax credits to which you are entitled.

Do Your Business Activities Qualify?

Educating yourself on some of the activities in which your business can engage to qualify for R & D tax credits is an important first step. Ask yourself if your business does any of the activities listed below:

  • Develops new products, software, techniques, formulas
  • Improves current products, formulas, techniques
  • Creates more reliable products
  • Develops prototypes
  • Designs tools, molds, jigs or dies
  • Applies for patents
  • Tests for quality certification
  • Tests new concepts

If your company does any of these operations, you may qualify for lucrative R & D tax credits.

Do You Have Documentation?

You’ll want to ascertain the types of expenditures that your company has made relating to research and development, its supervision, and the technical support that was provided. Did you pay salaries and wages to employees who participated in the research done by your company? Did you pay contractors or other technical experts for their assistance during the research process? You may want to review your financial reports to determine what costs can be associated with R & D in your business so that when you find a qualified team to assist you, you’ll be able to present credible documentation for your costs and expenses.

The Team with Whom You Should Partner

As a successful entrepreneur, you know the accuracy that is required and the records that are demanded when you are dealing with the IRS, the U.S. Treasury, or the State of Ohio; your documentation must be prepared with a commitment to excellence. At Swanson Reed, our team of professionals will provide you with forms and documents that are prepared specifically in accordance with tax rules, regulations, and laws appropriate to your Ohio-based company.   Our team is experienced, confident in our tried and trusted strategies, and professional in our presentation of the finished result for you and your Executive Team. Our experts can manage all facets of your R & D tax credit claim from start to finish.

Claiming research and development tax credits can be the catalyst that your business needs to take production to the next level and out-perform your competition. Partnering with the best will bring the results that you expect and deserve.

Making R&D Legislation Work for Your Ohio Business

Although the federal R&D (research and development) credit expires at the end of a given calendar year, Congress has extended legislation as a matter of course more than a dozen times since 1981. And, although various administrations have added to or subtracted from definitions of who qualifies and who doesn’t, the literal “bottom line” is that this credit seems to have an indefinite shelf life. If you do business in Ohio — and if you’ve never taken advantage of this benefit— you may want to think in terms of delving into the wonderful world of R&D.

Building a Better Mousetrap

Think your business doesn’t do anything that you could claim a research credit for? Think again. As an old proverb says, “Build a better mousetrap and the world will beat a path to your door.” Now, you may not be in the mousetrap business — but does any aspect of your company’s day-to-day activity improve upon an already-established practice or procedure? If so, you may have some tax relief coming.

You don’t have to invent from scratch to be inventive, and you don’t have to be doing groundbreaking research “where no man has gone before” in order to qualify as performing research. If your sales people work at new sales techniques that increase your growth…if your customer-service folks learn about the competition in order to highlight your product’s superiority…or if you really are building a “better” anything, you can apply for R&D credits to offset your corporate taxes.

Getting Specific

In terms of Ohio businesses, this benefit is called the Ohio Research and Development Tax Credit; it’s a nonrefundable credit against the Commercial Activity Tax (CAT). If you qualify for federal R&D tax credits under Section 41 of the Internal Revenue Code, you qualify for this credit as well, in that wages, supplies and other company expenses qualify as well as contract expenses.

Calculating it works like this: over the past three years, average your qualified research expenses; this becomes the basis upon which you can figure what you can claim this year, which is seven percent of the amount over that. The good news is that any unused credits can be carried forward for as much as seven years. The even better news is that you don’t need to worry about any special applications or pre-approvals to claim this credit; it can be part of your normal business tax return.

Caution: Potential Tax Traps Ahead

The particulars of any extension are mainly the items in question; the extension itself, being as popular an item as it is with business, is still likely to pass — but it’s likely to have retroactive effective dates that can have “ripple effects” carrying through into the next taxable years. Also, keep in mind that at the state level, credit expiration dates are different than they are on the federal level…so make sure there are no calendar “gotchas” that can sabotage your claim.

Maintain your process and documentation levels — even if the federal rules may still be “up in the air.” It’s the safest way to ensure you gain the maximum benefit with minimum hassle. Finally, be aware that state R&D credits are tied to state budgets — so you may not know your true tax status until your state has determined its budgetary credit limitations. In case of a limited “pool” of credit available, it’s first-come, first-served, so file your claims in a timely manner.

Ask an Authority

Dealing with business and corporate tax law is a complex process, and a business owner can’t be expected to be on top of it without sacrificing something else…like running his or her business. This is where the services of an expert business-tax consultant can be invaluable; don’t hesitate to seek one out.