Accounting For Research And Development Tax Credits

A research and development tax credit is available from the federal government to encourage businesses to invest in innovation.  The tax credit, which is not a refund but a reduction in a company’s taxes, helps offset the costs associated with research and development activities.

Who Provides Tax Credit

There are credits offered by the federal government in the field of scientific research, manufacturing and other industries. The bulk of research and development tax credits are available through the states. The states see these credits as an incentive to get businesses to locate in their borders. This provides jobs, which increases the tax revenue for the state, and creates economic development opportunities.  The use of research and development credits by states results in a win-win situation for both the business and the state.

How the Accounting is Prepared

Accounting for research and development credits is done by the business in connection with its financial accounting and research departments. Research and development credits are not given to a business upfront. Like other types of credits, a research and development credit is used to reduce the taxes of the business. These are referred to as “below the line reductions” and differ from deductions. A deduction is called an “above-the-line” reduction in a business’ taxable income.

IRS and State rules

The accounting that takes place for the research and development credit is done in accordance with the filing rules for the state or IRS. There are published guidelines available that instruct a business on how to account for a credit, depending on the research and development activity. In many cases, a basic understanding of the credit is required before a company engages in a research or product development activity. This is part of the project cost accounting that is necessary for all businesses.

Hiring a Cost Accountant

For information on the specifics of project cost accounting for research and development credits, a business should hire a qualified certified public accountant. The laws are too complex to understand quickly and mistakes are too costly. For example, a business needs to understand which research and development activities qualify for a credit. What states offer these credits and what are the reporting rules relative to their tax code. They will also need to know which federal government department provides credits and the necessary documentation that must be maintained in order to claim the credit.

An accountant knows how to answer these questions and is the person in the company responsible for maintaining the necessary books and records. Accounting for research and development credits is a process that can be involved and is best left to the expertise of someone who understands the process and how it works.