The United States Congress last December made a valuable tax credit permanent. If this sounds like a freebee for large companies that invest heavily in research and development, be advised: It isn’t.
The Research and Experimentation Tax Credit originated in 1981 as a provision of the Economic Recovery Act with the original expiration date of 1985. Since then, it has been temporarily extended numerous times until being made permanent in 2015.
The credit affects approximately 16,000 companies, most of which are manufacturers. For companies with more than $250b in sales, the average credit is approximately $4m. Awareness of the credit is high and it is well known that significant cost savings are at stake.
So, why is the credit’s permanence such a big deal?
Because the credit was historically renewed on a temporary basis, some companies have simply always claimed it in a manual way, without any automation. Those companies are now suddenly confronted with a permanent tax credit for which one has never invested in a way to gather the data efficiently or with the intent to maximize the credit. As more companies increase their R&D credit given the new permanence the number of audits will increase. The need for automation and organized documentation supporting their calculations will be as important as ever.
The bottom line is that tax departments can now be certain the R&D Tax Credit isn’t going anywhere, and the time to automate it is now.
In this brief blog series, we’ll examine best practices for addressing these challenges and how to make taking advantage of this credit easy for in-house tax departments as well as the auditors that serve them.