The Research and Development (R&D) Tax Credit applies to almost every industry, but not all companies that are eligible are taking advantage of it. Many government contractors in particular wouldn’t suspect that they could qualify for the (R&D) credit and that they could be missing out on valuable tax savings.
In this video, Hobie Frady and Jared Sharp discuss the specific activities that qualify for the R&D credit and what government contractors can look for to generate tax savings. Watch the video or read the transcript below to learn how this tax credit can specifically benefit government contractors.
Hobie Frady: I’m Hobie Frady. I lead the Government Contract Industry Group here at Warren Averett. I’m here with Jared Sharp. Jared’s a Partner in our tax division but spends a lot of his time on R&D tax credits. Jared, I know recently we’ve talked with a lot of government contractors about the Research and Development credit. What does a contractor look for to know if they may qualify for some of these tax savings?
Jared Sharp: Yeah, Hobie. So, a lot of contractors can qualify based on the activities they perform. So, if they’re developing new products, that’s the obvious answer, but it also goes deeper than that. If they have conducted process improvements, concept development, hypothesis testing, concept testing, engineering activities—if they are doing anything in those areas, then it’s possible they have an opportunity to save with the R&D tax credit.
Hobie Frady: Okay, so what kind of expenses—I know labor is one of the—but what other expenses would qualify?
Jared Sharp: Yeah, the direct labor of any employee who’s performing R&D-related activities can qualify for tax savings. If there are contract laborers involved—so, they’re outsourcing to a third-party for research activities—those dollars spent on outside contractors can qualify, plus the cost of supplies. If they’re using materials in the process, using R&D to develop a prototype so to speak, it can qualify for the R&D credit as well.
Hobie Frady: And this isn’t just internal R&D, right? It can also be services they’re providing for a customer?
Jared Sharp: That’s right. Obviously, the internal R&D efforts would qualify, but outside (for customers) R&D processes performed under a contract can qualify as well.
Hobie Frady: Are there any unique circumstances that government contractors need to be aware of to claim these types of tax credits?
Jared Sharp: Yes, there are. To qualify there must be two components. There has to be a financial risk, and you have to retain some rights in the technology that you are developing. Under the financial risk component for government contractors there’s usually a firm, fixed-priced contract that is inherently risky and, therefore, can typically qualify for the R&D credit. The time, material, cost and type of arrangements are all typically less risky and have a harder time qualifying for R&D savings. On the technology side, as long you retain some substantial rights of what you’re developing, you can typically qualify for the Research and Development credit. You don’t have to have exclusive rights, but you do have to retain some rights.
Hobie Frady: So, if you or someone at your company thinks that you have activities that might qualify for this credit, please feel free to give us a call. We’d be happy to talk to you about it.
Hobie Frady leads Warren Averett’s Government Contracting industry group and has over 20 years of accounting and management experience in the government contracting industry. Jared Sharp leads the Huntsville Tax Division and specializes in helping clients find savings opportunities through the R&D tax credit.
If your company has made conducted research and development efforts, you may qualify for the R&D tax credit. The federal government also offers many other tax credits that may benefit your business. Warren Averett’s Quali-Finder™ is a diagnostic tool that identifies tax credits and incentives that your business may be overlooking. You can learn more about Quali-Finder and begin the process here.