The R&D tax credit is a government program available in most developed nations that offers more than $2 billion in funding every year. If you are a new business that is starting up or even an established business in your growth phase, you may be eligible for funding, writes May Lee.
What is the R&D (Research and Development) tax credit?
The R&D tax credit is a government program that provides a cash refund of up to 45% of the money spent by businesses in developing something new or improved.
The program aims to increase competitiveness of businesses and improve productivity by incentivising businesses to undertake innovations that result in economy-wide benefits.
Because the policy objective is so broad-based, the types of businesses that it applies to are similarly broad. As an example, vegan businesses involved in food manufacturing, cosmetics and skincare, IT technologies and medical research would be eligible to apply under this program.
The R&D tax credit is available in most developed nations including the US, Australia and UK. The program is governed by the relevant tax authority in each of these countries, namely the Australian Taxation Office, US Internal Revenue Service and the UK HM Revenue and Customs. Rules can differ between countries, but in general the definition of “R&D” remains consistent.
How do I know if I do R&D?
If you are spending money to improve existing or create new products, services or processes – there’s a good chance that you are doing R&D. Examples include improving a manufacturing process, creating an app with new functionality or developing a new food or drink with a unique blend of ingredients.
In general, it is accepted that you are doing R&D if you went through the following process:
• Identify a problem
• Brainstorm to identify potential solutions
• Experiment with different solutions to solve a previously unsolved problem
For something to be considered R&D, there is no legislative requirement that it be first in the world.
Is it a competitive program?
The R&D tax credit is not a competitive program. That means if your business meets the eligibility criteria, it is entitled to funding. However, the R&D tax credit is based on federal legislation, is complex and requires stringent record-keeping. With good consulting advice, this can be eased considerably.
Example case study: Vegan Food Express
Please note that this case study is NOT based on real characters or businesses.
This example case study explores some of the stages that a small company may follow to incorporate commercially available technology into existing production. In doing so, it conducted activities that are eligible for the R&D tax credit.
Owned and operated by two vegan chefs, “Vegan Food Express” (fictitious company) is a small company that prepares ready-to-eat gourmet meals. The company began by preparing meals for busy families wanting a healthier plant-based option.
Encouraged by the steady growth in the ready-to-eat meal market, Vegan Food Express expanded business operations by increasing its production capacity. With the increased capacity, they sought to supply larger quantities of ready-to-eat meals to leading retailers.
During its early consultations, Vegan Food Express found that large retailers needed the meals to maintain their quality over a longer shelf life.
Accordingly, the company decided to improve its product by extending the refrigerated shelf life to satisfy the large retailers’ requirements. The two chefs behind Vegan Food Express brainstormed to identify potential solutions. They also researched available technology in this field and discovered that the technique of High Pressure Processing could extend the shelf life of their products.
Vegan Food Express’s R&D project is titled “Investigation of high pressure processing and its ability to extend shelf-life of ready to eat meals”.
The company’s eligible R&D expenditure includes a portion of staff salary, overheads and consumables.
The R&D tax credit should be considered at the end of every financial year. If eligible, the R&D tax credit claim will be submitted along with the income tax return to the governing tax authority.